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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-11997
Carrington Laboratories, Inc.
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(Exact name of Registrant as specified in its charter)
Texas 75-1435663
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(State of Incorporation) (IRS Employer ID No.)
2001 Walnut Hill Lane, Irving, Texas 75038
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(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 518-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant (treating all executive officers
and directors of the Registrant and holders of 10% or more of shares
outstanding, for this purpose, as if they may be affiliates of the
Registrant) was $10,602,000, computed by reference to the price at which
common equity was sold on June 30, 2002.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
9,991,651 shares of Common Stock, par value $.01 per share, were outstanding
on March 11, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
shareholders to be held on May 8, 2003 are incorporated by reference into
Part III hereof, to the extent indicated herein.
PART I
ITEM 1. BUSINESS.
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General
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Incorporated in Texas in 1973, Carrington Laboratories, Inc. ("Carrington"
or the "Company") is a research-based biopharmaceutical, medical device, raw
materials and nutraceutical company engaged in the development,
manufacturing and marketing of naturally-derived complex carbohydrates and
other natural product therapeutics for the treatment of major illnesses, the
dressing and management of wounds and nutritional supplements. The Company
is comprised of two business segments. See Note Thirteen to the
consolidated financial statements in this Annual Report for financial
information about these business divisions. The Company sells prescription
and nonprescription human and veterinary products through its Medical
Services Division. Through Caraloe, Inc., its consumer products subsidiary,
the Company sells consumer and bulk raw material products and also provides
product development and manufacturing services to customers in the cosmetic,
nutraceutical and medical markets. The Company's research and product
portfolio are based primarily on complex carbohydrates isolated from the
Aloe vera L. plant.
In October 2001, the Company incorporated, a wholly-owned subsidiary named
DelSite Biotechnologies, Inc. ("DelSite"). DelSite operates independently
from the Company's research and development program and is responsible for
the research, development and marketing of the Company's proprietary
GelSite[TM] technology for controlled release and delivery of bioactive
pharmaceutical ingredients.
Medical Services Division
-------------------------
Carrington's Medical Services Division offers a comprehensive line of wound
management products to hospitals, alternate care facilities, cancer centers
and the home health care market. The Company's products are designed to
provide patients with the highest quality of care. Carrington products are
used in a wide range of acute and chronic wounds, for skin conditions and
incontinence care. The primary marketing emphasis for Carrington's wound
and skin care products is directed toward hospitals, nursing homes,
alternate care facilities, cancer centers, home health care providers and
managed care organizations. The wound and skin care product lines are being
promoted primarily to physicians and specialty nurses, e.g., enterostomal
therapists.
In response to changing market conditions, the Company decided during 2000
to redirect the distribution of its Medical Services products from multiple
distributors to a single, sole-source distributor. As a result of this
decision, the Company entered into an exclusive Distributor and License
Agreement effective December 1, 2000 with Medline Industries, Inc.
("Medline"). Medline is now responsible for all sales and marketing and
distribution efforts for Carrington's wound and skin care product lines.
The Company also has a Supply Agreement with Medline that allows the Company
to manufacture specific products where the Company can meet or reduce
Medline's current purchase price.
The Company maintains control of certain national pricing agreements which
cover hospitals, alternate care facilities, home health care agencies and
cancer centers. These agreements allow Medline representatives to make
presentations in member facilities throughout the country. In order to
promote continued brand-name recognition, the Company has resumed some
limited marketing and advertising to bolster Medline's efforts in these
areas.
The Company has several distribution and licensing agreements for the sale
of its products into international markets. The Company also sells wound
care products into international markets on a non-contract, purchase
order basis. Opportunities in the growing Internet market are also
addressed through the Company's websites, www.carringtonlabs.com. and
www.woundcare.com.
The Company also produces Acemannan Immunostimulant[TM], a product fully
licensed by the United States Department of Agriculture ("USDA") as an
adjuvant therapy for certain cancers in dogs and cats. This product, in
addition to several wound and skin care products developed specifically for
the veterinary market, are marketed and distributed through an exclusive
distribution arrangement with Farnam Companies, Inc., a leading veterinary
marketing company.
Carrington is actively involved in developing and promoting the SaliCept[TM]
line of products, which includes an oral rinse, patches for oral wounds and
extraction sites, and other products. The SaliCept line[TM] is supported by
a dedicated sales representative and strategic partners for this line are
being considered.
Caraloe, Inc.
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Caraloe, Inc., a subsidiary of the Company, markets or licenses consumer
products and bulk raw materials utilizing the Company's patented complex
carbohydrate technology into the consumer health and nutritional products
markets. Caraloe's premier product is Manapol[R] powder, a bulk raw
material rich in complex carbohydrates. Manapol[R] powder is marketed to
manufacturers of nutritional products who desire quality complex
carbohydrate ingredients for their finished products. Caraloe also markets
finished products containing Manapol[R] powder into domestic health and
nutritional products markets through health food stores, through internet
marketing services at www.aloevera.com, and the international marketplace on
a non-contract, purchase order basis. In the fourth quarter of 2000,
Caraloe introduced a new raw material, Hydrapol[TM], for use by cosmetic
manufacturers.
In 1997, Caraloe signed a non-exclusive supply agreement with a major
customer to supply Manapol[R] powder. This agreement was renewed through
August 2003 and contains monthly minimum purchase requirements. During
2000, 2001, and 2002 sales of Manapol[R] powder to this customer represented
38%, 30%, and 35% respectively, of the Company's total revenues. The
Company expects this supply agreement will be renewed at the end of August
2003.
Caraloe, Inc. also provides product development and manufacturing services
to customers in the cosmetic, nutraceutical and medical markets. In June
2001 a development group was formed to concentrate efforts on providing
these services. The scope of services provided by this group includes
taking projects from formulation design through manufacturing, manufacturing
and filling according to customer-provided formulations and specifications,
filling customer-provided packaging components and assembling custom kits
for customers.
In December 2002 the Company entered into an agreement to acquire certain
assets of the Custom Division of Creative Beauty Innovations, Inc. ("CBI"),
including specialized manufacturing customer information, intellectual
property and equipment. CBI is a privately held manufacturer of skin and
cosmetic products with operations in Carrollton, Texas.
Under the agreement, the Company paid CBI $501,000 at closing and deposited
$500,000 in escrow, which was released to CBI on February 28, 2003. In
addition, Carrington agreed (i) to purchase inventory of CBI for an amount
not greater than $700,000, to be paid six months after closing and (ii) to
pay CBI an amount equal to 9.0909% of Carrington's net sales up to $6.6
million per year and 8.5% of Carrington's net sales over $6.6 million per
year of CBI products to CBI's existing customers for the next five years.
The acquired assets include equipment and other physical property previously
used by CBI's Custom Division to compound and package cosmetic formulations
of liquids, creams, gels and lotions into bottles, tubes or cosmetic jars.
Carrington intends to use these assets in a substantially similar manner.
The Company will provide services to these customers through the Caraloe,
Inc. development and manufacturing services group.
To finance the acquisition, the Company entered into an agreement with
Medline for accelerated payment of $2.0 million of the royalties due under
the Distributor and License Agreement. The royalty acceleration agreement
provides for each of the remaining quarterly royalty payments due to be paid
to the Company by Medline to be reduced by equal amounts, the sum of which
offsets the royalty advance. In addition, the Company will pay Medline
interest on the advance at the rate of 6.5% per year on the outstanding
balance of the advance.
DelSite Biotechnologies, Inc.
-----------------------------
In October 2001 the Company incorporated a wholly-owned subsidiary named
DelSite Biotechnologies, Inc. ("DelSite"). DelSite operates independently
from the Company's research and development program, which supports the
activities associated with the Company's Medical Services and Caraloe, Inc.
divisions, and is responsible for the research, development and marketing of
the Company's proprietary GelSite[TM] polymer (CR1013), a new and unique
complex carbohydrate, which was isolated in 1998 from Aloe vera L. DelSite
commenced operations in January 2002 and is currently developing new
technologies based on its GelSite[TM] polymer for controlled delivery of
bioactive proteins and peptides as therapeutics and vaccines.
In January 2002 DelSite formed a strategic collaboration with Southern
Research Institute, Inc. of Birmingham, Alabama, to assist in the
development and ultimate commercialization of the drug delivery technology
based on the GelSite[TM] polymer. Southern Research Institute is an
independent, not-for-profit center for scientific research affiliated with
the University of Alabama at Birmingham. Under the three year collaborative
agreement, DelSite retains all product rights plus intellectual property
rights to its existing technology as well as any discoveries made by DelSite
or Southern Research, either jointly or individually, as a result of any
project undertaken as part of the agreement. Southern Research will receive
fees and royalties when undertaking certain specified projects on behalf of
DelSite.
Research and Development
------------------------
General
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Carrington has developed proprietary processes for obtaining materials from
Aloe vera L. The Company intends to seek approval of the Food and Drug
Administration (the "FDA") and other regulatory agencies to sell products
containing materials obtained from Aloe vera L. in the United States and in
foreign countries. For a more comprehensive listing of the type, indication
and status of products currently under development by the Company, see
"Research and Development -- Summary" below. The regulatory approval
process, both domestically and internationally, can be protracted and
expensive, and there is no assurance that the Company will obtain approval
to sell its products for any treatment or use (see "Governmental Regulation"
below).
The Company expended approximately $3,602,000, $2,442,000 and $3,580,000 on
research and development in fiscal 2000, 2001 and 2002, respectively. Of
the total expenditures for 2000, $623,000 reflect clinical trial costs
associated with the Phase III trial in ulcerative colitis. Research
activities associated with DelSite accounted for 51% of the 2002 research
and development expenditures.
DelSite Research and Development
--------------------------------
The Company believes that its products' functionality and/or pharmacological
activity make them potential candidates for further development as
pharmaceutical or therapeutic agents. In 2003, DelSite will focus its
activities in drug delivery through developing proof of concept data for
potential pharmaceutical partners. There is no assurance, however, that
DelSite will be successful in its efforts.
The Company sponsors a research and development laboratory at Texas A&M
University in association with the College of Veterinary Medicine to support
research activities of the Company and its DelSite subsidiary. Pursuant to
this arrangement, the Company has access to leading authorities in the life
sciences, as well as facilities and equipment to help further the Company's
research programs.
DelSite is developing a new platform technology based on its proprietary
GelSite[TM] polymer (CR1013) for controlled delivery of bioactive proteins
and peptides as therapeutics and vaccines. Basic proof of concept research
is continuing on this material, which includes both parenteral delivery of
therapeutic proteins and peptides and intranasal delivery of protein
antigens as vaccines. Selected studies have been completed through
sponsored research at Texas A&M and Southern Research Institute. Pilot
scale production has been accomplished and studies to refine the process are
ongoing. The technology has varied utility, but the primary focus of
research is in the area of drug delivery. Three patents covering this
invention have been issued to the Company with two patents pending. The
composition and process patent was issued in 1999.
Specialized Research and Development
------------------------------------
The Company also has a separate, specialized research team to support
research and in-house development for Carrington products as well as to
provide services to customers in the medical, nutraceutical and cosmetic
markets. These services typically include research and development of a
formulation from the customer's initial concept and specifications or, at
the customer's request, through reverse engineering a similar product.
Development efforts also include packaging design, label design and, where
required by regulations, production validation.
During 2002 the Company also initiated scale-up development activities for
the production of its proprietary oral patch product. This product had
previously been manufactured by an independent vendor on a bench-scale
basis. The Company purchased and installed production-scale equipment in
its Costa Rica facility to form, fill and seal blister packs. The patch
product is freeze-dried in the Company's existing freeze-drying equipment in
Costa Rica. Installation, operation and performance qualifications were
initiated in the fourth quarter of 2002 and completed in the first quarter
of 2003. The first products were produced in December 2002 and January
2003.
Human Clinical Studies
----------------------
Evaluation of Carrington[R] Oral Wound Rinse for Pain Associated with
Mucositis.
In March 1997, the FDA cleared Carrington to market an Oral Wound Rinse
for the management and relief of pain associated with mucositis and all
types of oral wounds. A 20 patient trial of a new formulation for the
product was completed in 2001. This trial evaluated the effectiveness and
duration of effect of Carrington[R] Oral Wound Rinse. All patients in the
trial reported that they experienced pain relief immediately upon use of the
product and 80% reported the duration of relief was 4-6 hours.
Evaluation of the SaliCept[TM] Oral Patch for Reduction in the Incidence of
Dry Socket.
An independent study conducted in 2000 that compared the incidence of
alveolar osteitis ("AO", also known as dry socket) in patients treated with
Gelfoam[R] soaked with an antibiotic or SaliCept[TM] Patches was conducted
in 2000. A retrospective evaluation was performed of 587 records of
Gelfoam[R] treated patients compared to a prospective trial of 608 patients
treated with SaliCept[TM] Patches. The SaliCept[TM] Patch significantly
reduced the incidence of AO when compared to the antibiotic-soaked
Gelfoam[R]. The study results were filed with the FDA and the Company was
granted clearance by the agency in the fourth quarter 2001 to market the
patch as a 510(k) device for management of AO.
Research and Development Summary
--------------------------------
The following table outlines the status of the products and potential
indications of the Company's products developed, planned or under
development. There is no assurance of successful development, completion or
regulatory approval of any product not yet on the market.
PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED,
PLANNED OR UNDER DEVELOPMENT
PRODUCT OR POTENTIAL
POTENTIAL INDICATION MARKET APPLICATIONS STATUS
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Topical
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Dressings Pressure and Vascular Ulcers Marketed
Dressings Diabetic Ulcers, Surgical Wounds Marketed
Cleansers Wounds Marketed
Anti-fungal Cutaneous Fungal Infection Marketed
Hydrocolloids Wounds Marketed
Alginates Wounds Marketed
Oral
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Human
Pain Reduction Mucositis Marketed
Dental
Pain Reduction Aphthous Ulcers, Oral Wounds Marketed
Post Extraction Wounds Oral Surgery Marketed
Injectable
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Human
Neutropenia Neutropenia associated with Discovery
cancer
GelSite[TM] polymer (CR1013) Drug delivery Preclinical
Intranasal
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GelSite[TM] polymer (CR1013) Vaccine delivery Preclinical
Veterinary
Adjunct for cancer Fibrosarcoma Marketed
Nutraceuticals
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Immune Enhancing Product Manapol[R]/Maitake Gold 404[R] Marketed
Immune Enhancing Product Manapol[R]/Calcium Enriched Clinical
Evaluation
Licensing Strategy
------------------
The Company expects that prescription pharmaceutical products containing
certain defined drug substances will require a substantial degree of
development effort and expense. Before governmental approval to market any
such product is obtained, the Company may license these products for certain
indications to other pharmaceutical companies in the United States or
foreign countries and require such licensees to undertake the steps
necessary to obtain marketing approval in a particular country or for
specific indications.
Similarly, the Company intends to license third parties to market products
containing defined chemical entities for certain human indications when it
lacks the expertise or financial resources to market such products
effectively. If the Company is unable to enter into such agreements, it may
undertake marketing the products itself for such indications. The Company's
ability to market these products for specific indications will depend
largely on its financial condition at the time and the results of related
clinical trials. There is no assurance that the Company will be able to
enter into any license agreements with third parties or that, if such
license agreements are concluded, they will contribute to the Company's
overall profits.
Raw Materials and Processing
----------------------------
The principal raw material used by the Company in its operations is the leaf
of the plant known as Aloe vera L. Through patented processes, the Company
obtains several bulk freeze-dried aloe extracts from the central portion of
the Aloe vera L. leaf known as the gel. A basic bulk mannan, Acemannan
Hydrogel[TM], is used as an ingredient in certain of the Company's
proprietary wound and skin care products.
The Company owns a 405-acre farm in the Guanacaste province of northwest
Costa Rica which currently has approximately 113 acres planted with Aloe
vera L. The Company is currently performing a land reclamation project on
the farm to increase productive acreage. Currently, the Company's need for
leaves exceeds the supply of harvestable leaves from the Company's farm,
requiring the purchase of leaves from other sources in Costa Rica at prices
comparable to the cost of acquiring leaves from the Company's farm. The
Company has entered into several supply agreements with local suppliers near
the Company's factory. The Company anticipates that the local suppliers
will be able to meet all of its requirements for leaves in 2003.
The Company has a 23% ownership interest in Aloe and Herbs International,
Inc., ("Aloe & Herbs"), a Panamanian corporation formed for the purpose of
establishing an Aloe vera L. farm in Costa Rica. The Company purchases
leaves from Rancho Aloe, S.A., ("Rancho Aloe") a wholly owned subsidiary of
Aloe & Herbs, which has a 5,000-acre farm in close proximity to the
Company's farm, at a nominal price per kilogram of leaves supplied, with the
final price payable to Rancho Aloe based upon the yield of the final
product.
As of December 31, 2002, Rancho Aloe was providing an average of 67% of the
Company's monthly requirement of leaves. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for further information regarding the Company's
relationship with Aloe & Herbs.
Manufacturing
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Since 1995, the Company's manufacturing facility has been located in the
Company's headquarters in Irving, Texas. The Company believes that this
manufacturing facility has sufficient capacity to provide for the present
line of products and to accommodate new products and sales growth. Final
packaging of certain of the Company's wound care products is completed by
outside vendors. The Company's calcium alginates, films, hydrocolloids,
foam dressings, gel sheets, tablets, capsules, and freeze-dried products are
being provided by third parties.
All of the Company's proprietary bulk pharmaceutical products and freeze-
dried Aloe vera L. extracts are produced in its processing plant in Costa
Rica. This facility has the ability to supply the bulk aloe raw materials
requirements of the Company's current product lines and bulk material
contracts for the foreseeable future. Certain liquid nutraceutical products
which the Company provides to customers on a custom manufacturing basis are
also produced at the Costa Rica facility. In addition, production of the
Salicept[TM]Patch has been transferred to the plant in Costa Rica to better
meet anticipated market demands for the product for post extraction wounds
and aphthous ulcers.
Competition
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Research and Development. The biopharmaceutical field is expected to
continue to undergo rapid and significant technological change. Potential
competitors in the United States are numerous and include pharmaceutical,
chemical and biotechnology companies. Many of these companies have
substantially greater capital resources, research and development staffs,
facilities and expertise (in areas including research and development,
manufacturing, testing, obtaining regulatory approvals and marketing) than
the Company. This competition can be expected to become more intense as
commercial applications for biotechnology and pharmaceutical products
increase. Some of these companies may be better able than the Company to
develop, refine, manufacture and market products which have application to
the same indications as the Company is exploring. The Company understands
that certain of these competitors are in the process of conducting human
clinical trials of, or have filed applications with government agencies for
approval to market certain products that will compete with the Company's
products, both in its present wound care market and in markets associated
with products the Company currently has under development.
Medical Services Division and Caraloe, Inc. The Company competes against
many companies that sell products which are competitive with the Company's
products, with many of its competitors using very aggressive marketing
efforts. Many of the Company's competitors are substantially larger than
the Company in terms of sales and distribution networks and have
substantially greater financial and other resources. The Company's ability
to compete against these companies will depend in part on the expansion of
the marketing network for its products. The Company believes that the
principal competitive factors in the marketing of its products are their
quality, and that they are naturally based and competitively priced.
Governmental Regulation
-----------------------
The production and marketing of the Company's products, and the Company's
research and development activities, are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United
States and other countries. In the United States, drug devices for human
use are subject to rigorous FDA regulation. The Federal Food, Drug and
Cosmetic Act, as amended (the "FFDC Act"), the regulations promulgated
thereunder, and other federal and state statutes and regulations govern,
among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of
the Company's products. For marketing outside the United States, the
Company is subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement may vary widely from country to country.
Food and Drug Administration. The contents, labeling and advertising of
many of the Company's products are regulated by the FDA. The Company is
required to obtain FDA approval before it can study or market any proposed
prescription drugs and may be required to obtain such approval for proposed
nonprescription products. This procedure involves extensive clinical
research, and separate FDA approvals are required at various stages of
product development. The approval process requires, among other things,
presentation of substantial evidence to the FDA, based on clinical studies,
as to the safety and efficacy of the proposed product.
After approval, manufacturers must continue to expend time, money and effort
in production and quality control to assure continual compliance with the
current Good Manufacturing Practices regulations. Also, under the new
program for harmonization between Europe and the U.S. and the ISO 9001
Certification Program, a company can, under certain circumstances after
application, have a new drug approved under a process known as
centralization rather than having to go through a country-by-country
approval in the European Union.
Certain of the Company's wound and skin care products are registered with
the FDA as "devices" pursuant to the regulations under Section 510(k) of the
FFDC Act. A device is a product used for a particular medical purpose, such
as to cover a wound, with respect to which no pharmacological claim can be
made. A device which is "substantially equivalent" to another device
existing in the market prior to May 1976 can be registered with the FDA
under Section 510(k) and marketed without further testing. A device which
is not "substantially equivalent" is subject to an FDA approval process
similar to that required for a new drug, beginning with an Investigational
Device Exemption and culminating in a Premarket Approval. The Company has
sought and obtained all its device approvals under Section 510(k). The
Company currently markets seven (7) products which require a prescription as
medical devices.
Other Regulatory Authorities. The Company's advertising and sales practices
are subject to regulation by the Federal Trade Commission (the "FTC"), the
FDA and state agencies. The Company's processing and manufacturing plants
are subject to federal, state and foreign laws and to regulation by the
Bureau of Alcohol, Tobacco and Firearms of the Department of the Treasury
and by the Environmental Protection Agency (the "EPA"), as well as the FDA
and USDA.
The Company believes that it is in substantial compliance with all
applicable laws and regulations relating to its operations, but there is no
assurance that such laws and regulations will not be changed. Any such
change may have a material adverse effect on the Company's operations.
The manufacturing, processing, formulating, packaging, labeling and
advertising of products of the Company's subsidiary, Caraloe, are also
subject to regulation by one or more federal agencies, including the FDA,
the FTC, the USDA and the EPA. These activities are also regulated by
various agencies of the states, localities and foreign countries to which
Caraloe's products are distributed and in which Caraloe's products are sold.
The FDA, in particular, regulates the formulation, manufacture and labeling
of vitamin and other nutritional supplements.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised
the provisions of the FFDC Act concerning the composition and labeling of
dietary supplements and, in the judgment of the Company, is favorable to the
dietary supplement industry. The legislation created a new statutory class
of "dietary supplement" which includes vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet.
DSHEA grandfathered, with certain limitations, dietary ingredients on the
market before October 15, 1994. A dietary supplement which contains a new
dietary ingredient, one not on the market before October 15, 1994, requires
evidence of a history of use or other evidence of safety establishing that
it will reasonably be expected to be safe. The majority of the products
marketed by Caraloe are classified as dietary supplements under DSHEA.
Both foods and dietary supplements are subject to the Nutrition Labeling and
Education Act of 1990 (the "NLEA"), which prohibits the use of any health
claim for foods, including dietary supplements, unless the health claim is
supported by significant scientific agreement and is either pre-approved by
the FDA or the subject of substantial government scientific publications and
a notification to the FDA. To date, the FDA has approved the use of only
limited health claims for dietary supplements. However, among other things,
DSHEA amended, for dietary supplements, the NLEA by providing that
"statements of nutritional support" may be used in labeling for dietary
supplements without FDA pre-approval if certain requirements, including
prominent disclosure on the label of the lack of FDA review of the relevant
statement, possession by the marketer of substantiating evidence for the
statement and post-use notification to the FDA, are met. Such statements
may describe how particular nutritional supplements affect the structure,
function or general well-being of the body (e.g., "promotes cardiovascular
health").
Advertising and label claims for dietary supplements and conventional foods
have been regulated by state and federal authorities under a number of
disparate regulatory schemes. There can be no assurance that a state will
not interpret claims presumptively valid under federal law as illegal under
that state's regulations, or that future FDA regulations or FTC decisions
will not restrict the permissible scope of such claims.
Governmental regulations in foreign countries where Caraloe plans to
commence or expand sales may prevent or delay entry into the market or
prevent or delay the introduction, or require the reformulation, of certain
of Caraloe's products. Compliance with such foreign governmental
regulations is generally the responsibility of Caraloe's distributors for
those countries. These distributors are independent contractors over which
Caraloe has limited control.
As a result of Caraloe's efforts to comply with applicable statutes and
regulations, Caraloe has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its
sales and marketing program. Caraloe cannot predict the nature of any
future laws, regulations, interpretations or applications, nor can it
determine what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on its business in the future.
They could, however, require the reformulation of certain products to meet
new standards, the recall or discontinuance of certain products not capable
of reformulation, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling, and/or
scientific substantiation. Any or all of such requirements could have a
material adverse effect on the Company's results of operations and financial
condition.
Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive
position of the Company.
Patents and Proprietary Rights
------------------------------
As is industry practice, the Company has a policy of using patents,
trademarks and trade secrets to protect the results of its research and
development activities and, to the extent it may be necessary or advisable,
to exclude others from appropriating the Company's proprietary technology.
The Company's policy is to protect aggressively its proprietary technology
by seeking and enforcing patents in a worldwide program.
The Company has obtained patents or filed patent applications in the United
States and approximately 26 other countries in three series regarding the
compositions of acetylated mannan derivatives, the processes by which they
are produced and the methods of their use. The first series of patent
applications, relating to the compositions of acetylated mannan derivatives
and certain basic processes of their production, was filed in a chain of
United States patent applications and its counterparts in the other 26
countries. The first United States patent application in this first series,
covering the composition claims of acetylated mannan derivatives, matured
into United States Patent No. 4,735,935 (the "935 Patent"), which was issued
on April 5, 1988. United States Patent No. 4,917,890 (the "890 Patent") was
issued on April 17, 1990 from a divisional application to the 935 Patent.
This divisional application pertains to most of the remaining claims in the
original application not covered by the 935 Patent. The 890 Patent
generally relates to the basic processes of producing acetylated mannan
derivatives, to certain specific examples of such processes and to certain
formulations of acetylated mannan derivatives. Two other divisional
applications covering the remaining claims not covered by the 890 Patent
matured into patents, the first on September 25, 1990, as United States
Patent No. 4,959,214, and the second on October 30, 1990, as United States
Patent No. 4,966,892. Foreign patents that are counterparts to the
foregoing United States patents have been granted in some of the member
states of the European Economic Community and several other countries.
The second series of patent applications related to preferred processes for
the production of acetylated mannan derivatives. One of them matured into
United States Patent No. 4,851,224, which was issued on July 25, 1989. This
patent is the subject of a Patent Cooperation Treaty application and
national foreign applications in several countries. An additional United
States patent based on the second series was issued on September 18, 1990,
as United States Patent No. 4,957,907.
The third series of patent applications, relating to the uses of acetylated
mannan derivatives, was filed subsequent to the second series. Three of
them matured into United States Patent Nos. 5,106,616, issued on April 21,
1992; 5,118,673, issued on June 2, 1992, and 5,308,838, issued on May 3,
1994. The Company has filed a number of divisional applications to these
patents, each dealing with specific uses of acetylated mannan derivatives.
Patent Cooperation Treaty applications based on the parent United States
applications have been filed designating a number of foreign countries where
the applications are pending. In addition, the Company has also obtained a
patent in the United States relating to a wound cleanser, U.S. Patent
No. 5,284,833, issued on February 8, 1994.
The Company has obtained a patent in the United States relating to a
therapeutic device made from freeze-dried complex carbohydrate hydrogel
(U.S. Patent No. 5,409,703, issued on April 25, 1995). A Patent Cooperation
Treaty application based on the parent United States application has been
filed designating a number of foreign countries where the applications are
pending.
The Company has obtained patents in the United States (U.S. Patent No.
5,760,102, issued on June 2, 1998) and Taiwan (Taiwan Patent No. 89390,
issued on August 21, 1997) related to the uses of a denture adhesive and
also a patent in the United States relating to methods for the prevention
and treatment of infections in animals (U.S. Patent No. 5,703,060, issued on
December 30, 1997).
The Company obtained a patent in the United States (U.S. Patent
No.5,902,796, issued on May 11, 1999) related to the process for obtaining
bioactive material from Aloe vera L.
The Company obtained an additional patent in the United States (U.S. Patent
No. 5,929,051, issued on July 27, 1999) related to the composition and
process for a new complex carbohydrate (pectin) isolated from Aloe vera L.
Also obtained was a United States patent (U.S. Patent No. 5,925,357, issued
on July 20, 1999) related to the process for a new Aloe vera L. product that
maintains the complex carbohydrates with the addition of other substances
normally provided by "Whole Leaf Aloe."
Additionally, the Company obtained a Japanese letters-patent (Patent No.
2888249, having a Patent Registration Date of February 19, 1999) for the use
of acemannan (a) in a vaccine product; (b) in enhancing natural kill cell
activity and in enhancing specific tumor cell lysis by white cells and/or
antibodies; (c) in correcting malabsorption and mucosal cell maturation
syndromes in man or animals; and (d) in reducing symptoms associated with
multiple sclerosis.
The Company also received the grant of European Patent Application under No.
0611304, having the date of publication and mention of the grant of the
patent of September 15, 1999. This European Letters Patent claims the use
of acetylated mannan for the regulation of blood cholesterol levels and for
the removal of plaque in blood vessels. A patent was also issued in South
Korea. Applications are pending in Canada and Japan.
In addition, the Company obtained an Australian Patent (Patent No. 718631,
having an Accepted Journal Date of April 20, 2000) on Uses of Denture
Adhesive Containing Aloe Extract. On June 20, 2000 Singapore granted the
Company a patent on Bioactive Factors of Aloe Vera Plants (P-No. 51748).
The Company received the grant of two U.S. patents (Patent No. 6,274,548
issued August 14, 2001, and Patent No. 6,313,103 issued November 6, 2001)
associated with the use of pectins for purification, stabilization and
delivery of certain growth factors. Other U.S. PCT applications on Aloe
Pectin are pending. A U.S. patent application on growth factor and protease
enzyme is also pending.
The Company obtained on September 25, 2002, a European Patent (Patent No.
0884994) which was validated in Great Britain, Germany (No. 69715827.6),
France, Italy and Portugal associated with the uses of denture adhesive
containing Aloe Vera L. extract.
In addition, the Company was issued on October 13, 2002, a Canadian Patent
(No. 2,122,604) associated with the process for preparation of Aloe
Products.
The Company also obtained on June 24, 2002, a Korean Patent (No. 343293) and
on June 5, 2002, European Patent (No. 0705113) which was validated in Great
Britain, France, Germany (No. 69430746.7-08), Italy and Austria associated
with dried Hydrogel from Hydrophilic Hygroscopic Polymer.
The Company has filed and intends to file patent applications with respect
to subsequent developments and improvements when it believes such protection
is in the best interest of the Company. Although the scope of protection
which ultimately may be afforded by the patents and patent applications of
the Company is difficult to quantify, the Company believes its patents will
afford adequate protection to conduct the business operations of the
Company. However, there can be no assurance that (i) any additional patents
will be issued to the Company in any or all appropriate jurisdictions, (ii)
litigation will not be commenced seeking to challenge the Company's patent
protection or such challenges will not be successful, (iii) processes or
products of the Company do not or will not infringe upon the patents of
third parties or (iv) the scope of patents issued to the Company will
successfully prevent third parties from developing similar and competitive
products. It is not possible to predict how any patent litigation will
affect the Company's efforts to develop, manufacture or market its products.
The Company also relies upon, and intends to continue to rely upon, trade
secrets, unpatented proprietary know-how and continuing technological
innovation to develop and maintain its competitive position. The Company
typically enters into confidentiality agreements with its scientific
consultants, and the Company's key employees have entered into agreements
with the Company requiring that they forbear from disclosing confidential
information of the Company and assign to the Company all rights in any
inventions made while in the Company's employ relating to the Company's
activities. Accordingly, the Company believes that its valuable trade
secrets and unpatented proprietary know-how are adequately protected.
The technology applicable to the Company's products is developing rapidly.
A substantial number of patents have been issued to other biopharmaceutical
companies. In addition, competitors have filed applications for, or have
been issued, patents and may obtain additional patents and proprietary
rights relating to products or processes competitive with those of the
Company. To the Company's knowledge, acetylated mannan derivatives do not
infringe any valid, enforceable United States patents. A number of patents
have been issued to others with respect to various extracts of the Aloe vera
L. plant and their uses and formulations, particularly in respect to skin
care and cosmetic uses. While the Company is not aware of any existing
patents which conflict with its current and planned business activities,
there can be no assurance that holders of such other Aloe vera L.-based
patents will not claim that particular formulations and uses of acetylated
mannan derivatives in combination with other ingredients or compounds
infringe, in some respect, on these other patents. In addition, others may
have filed patent applications and may have been issued patents relating to
products and technologies potentially useful to the Company or necessary to
commercialize its products or achieve their business goals. There is no
assurance that the Company will be able to obtain licenses of such patents
on acceptable terms.
The Company has given the trade name Carrasyn[R] to certain of its products
containing acetylated mannans. The Company has filed a selected series of
domestic and foreign trademark applications for the marks Manapol[R] powder,
Carrisyn[R], Carrasyn[R] and CarraGauze[R]. Further, the Company has
registered the trademark AVMP[R] Powder and the trade name Carrington[R] in
the United States. In 1999, the Company obtained four additional registered
trademarks in Brazil. The Company believes that its trademarks and trade
names are valuable assets.
In June 2000 the Company obtained registration in the United States of its
mark AloeCeuticals[R] for its skin care and nutritional supplement products.
In September 2002 the Company obtained registration in the United States of
its mark "CaraKlenz[R]" for its proprietary wound cleanser product with that
name.
In addition, applications for the registration marks ISG[TM], APEC[TM],
GELSITE[TM] and ORAPATCH[TM] are pending in the U.S.
Employees
---------
As of February 28, 2003, the Company employed 252 persons, of whom 45 were
engaged in the operation and maintenance of its Irving, Texas processing
plant, 130 were employed at the Company's facility in Costa Rica and the
remainder were executive, research, quality assurance, manufacturing,
administrative, sales, and clerical personnel. Of the total number of
employees, 121 were located in Texas, 130 in Costa Rica and one in Puerto
Rico. The Company considers relations with its employees to be good. The
employees are not represented by a labor union.
ITEM 2. PROPERTIES.
----------
The Company believes that all its farming property, manufacturing and
laboratory facilities, as described below, and material farm, manufacturing
and laboratory equipment are in satisfactory condition and are adequate for
the purposes for which they are used, although the farm is not adequate
to supply all of the Company's needs for Aloe vera L. leaves. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information regarding the Company's arrangements to
purchase Aloe vera L. leaves.)
Walnut Hill Facility. The Company's corporate headquarters and principal
U.S. manufacturing facility occupy all of the 35,000 square foot office and
manufacturing building (the "Walnut Hill Facility"), which is situated on an
approximately 6.6 acre tract of land located in the Las Colinas area
of Irving, Texas. The Company owns the land and the building. The
manufacturing operations occupy approximately 19,000 square feet of the
facility, and administrative offices occupy approximately 16,000 square
feet.
Laboratory and Warehouse Facility. The Company has leased a 51,200 square
foot building in close proximity to the Walnut Hill facility for a ten-year
term to house its Research and Development, Quality Assurance and Quality
Control Departments. Laboratories and offices for DelSite are also located
in this facility. In addition, the Company utilizes a portion of the
building as warehouse space. The Company relocated those functions to this
facility in the third quarter of 2001.
Warehouse and Distribution Facility. In February 2003, the Company leased a
58,130 square foot building for a term of five years for additional
warehouse space. In addition, the Company relocated its distribution
operations to this new facility.
Costa Rica Facility. The Company owns approximately 405 acres of land in
the Guanacaste province of northwest Costa Rica. This land is being used
for the farming of Aloe vera L. plants and for a processing plant to produce
bulk pharmaceutical and injectable mannans and freeze-dried extracts from
Aloe vera L. used in the Company's operations. The processing plant became
operational in 1993.
ITEM 3. LEGAL PROCEEDINGS
-----------------
As reported in the Company's Form 10-Q Quarterly Report for the quarter
ended March 31, 2001, on April 3, 2001, Arthur Singer, a former employee of
the Company (the "Plaintiff"), filed a lawsuit in the United States District
Court for the Eastern District of New York, Long Island Division. The suit
alleges multiple causes of action against the Company and its chief
executive officer (the "Defendants") and seeks to recover damages in excess
of $4,000,000, plus legal fees and expenses. The Plaintiff, who was
formerly employed by the Company as a sales representative, alleges among
other things that the Company failed to pay the full amount of commissions
owed to him; that the Defendants breached an alleged contract of employment
with him; that the Company deprived him of the opportunity to exercise
vested stock options, prevented some of his unvested stock options from
vesting and caused all of his options to expire earlier than they otherwise
would have; and that the Defendants misrepresented that the Company intended
to retain him as an employee, fraudulently induced him to remain in its
employ and breached an implied covenant of fair dealing.
On May 31, 2001, the Defendants filed a motion seeking to have the complaint
dismissed or to have the case transferred to Texas. On August 28, 2001, the
Defendants' motion to transfer was granted, and the case was transferred to
the United States District Court for the Northern District of Texas, Dallas
Division, as Case No. 01-CV-1776. The Defendants and Plaintiff have both
filed motions for summary judgment which are pending before the Court.
This case was originally scheduled for trial on March 3, 2003. However, the
Court has continued the trial on this matter until such time has it has
ruled on the outstanding motions for summary judgment. The Company believes
that the Plaintiff's claims are without merit and intends to defend the
lawsuit vigorously.
On June 22, 2001, a lawsuit was filed by Swiss-American Products, Inc. ("the
Plaintiff") against G. Scott Vogel and the Company in the 193rd Judicial
District Court of Dallas County, Texas. The suit alleges, among other
things, that Mr. Vogel, the Company's former Vice President, Operations,
improperly obtained proprietary information of Swiss-American Products, Inc.
from a former employer that manufactured products under contract for
Plaintiff, and used that information on behalf of the Company, in breach of
certain common law duties and a confidentiality agreement between his former
employer and Plaintiff. The suit further alleges that Mr. Vogel and the
Company ("Defendants") conspired to unlawfully disclose, convert and
misappropriate Plaintiff's trade secrets.
The suit seeks temporary and permanent injunctive relief, including a
permanent injunction prohibiting Defendants from disclosing or using to
Plaintiff's disadvantage any confidential proprietary information belonging
to Plaintiff which Mr. Vogel allegedly obtained from his former employer, or
from developing or marketing products based on Plaintiff's formulas or other
information allegedly taken from Mr. Vogel's former employer. The suit also
seeks to recover damages in an unspecified amount from Defendants.
Defendants have filed a motion for sanctions against Plaintiff and its
counsel for filing an affidavit containing statements that Defendants
believe to be false and misleading and for making claims and seeking
injunctive relief based in part on those statements. In addition, the
Company has filed a counterclaim against Plaintiff, seeking to recover
actual and exemplary damages for wrongful injunction and also seeking a
declaratory judgment confirming the Company's right to manufacture for a
third party a wound cleanser that is similar to a wound cleanser that
Plaintiff has previously provided to that party.
Following a hearing on July 30, 2001, the trial court entered an order
setting the case for trial on July 30, 2002 and granting a temporary
injunction that prohibits Defendants from (i) disclosing or using any of
Plaintiff's confidential, proprietary or trade secret information; (ii)
developing or marketing a wound cleanser product that is the same or
substantially the same as reflected in a formula that is at issue in the
lawsuit (although this prohibition expressly does not apply to products
actively manufactured and sold by the Company before January 1, 2001 using
the exact same formula then in effect); and (iii) destroying, concealing,
altering, removing or disposing of any documents, files, computer data or
other things relating to Plaintiff or Mr. Vogel's former employer, or
containing or referring to trade secrets or confidential or proprietary
information of Plaintiff or Mr. Vogel's former employer. The Court
continued the July 30, 2002 trial setting; the case is currently set for
trial on May 6, 2003. The Company believes that Plaintiff's claims are
without merit and intends to vigorously defend against those claims and
pursue its counterclaim and motion for sanctions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
The Company did not submit any matter to a vote of security holders during
the fourth quarter of the fiscal year covered by this Annual Report.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol "CARN." The following table sets forth the high and low
sales prices per share of the Common Stock for each of the periods
indicated.
Fiscal 2001 High Low
----------- ---- ----
First Quarter $1.38 $1.03
Second Quarter 1.68 1.00
Third Quarter 1.40 0.88
Fourth Quarter 1.15 0.84
Fiscal 2002 High Low
----------- ---- ----
First Quarter $3.25 $1.07
Second Quarter 1.98 1.20
Third Quarter 1.33 0.95
Fourth Quarter 1.11 0.71
At March 11, 2003, there were 972 holders of record (including brokerage
firms) of Common Stock.
The Company has not paid any cash dividends on the Common Stock and
presently intends to retain all earnings for use in its operations. Any
decision by the Board of Directors of the Company to pay cash dividends in
the future will depend upon, among other factors, the Company's earnings,
financial condition and capital requirements.
In March 2001, the Board of Directors authorized the repurchase of up to
1,000,000 shares, or approximately 10.3%, of the Company's outstanding
Common Stock, dependent on market conditions. Under the authorization,
purchases of Common Stock may be made on the open market or through
privately negotiated transactions at such times and prices as are determined
jointly by the Chairman of the Board and the President of the Company. The
Board authorized the repurchase program based on its belief that the
Company's stock is undervalued in light of the Company's future prospects
and that it would be in the best interest of the Company and its
shareholders to repurchase some of its outstanding shares. As of March 11,
2003, the Company had repurchased 2,400 of its outstanding Common Stock
under the program.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
------------------------------------
The selected consolidated financial data below should be read in conjunction
with the consolidated financial statements of the Company and notes thereto
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected consolidated financial information for
the five years ended December 31, 2002, is derived from the consolidated
financial statements of the Company, of which the Statements have been
audited by Ernst & Young LLP, independent public accountants.
Years ended December 31,
(Dollars and numbers of shares in -----------------------------------------
thousands except per share amounts) 1998 1999 2000 2001 2002
------------------------------------------------------------------------------
OPERATIONS STATEMENT INFORMATION:
Revenue:
Net sales $23,625 $28,128 $22,833 $15,115 $15,571
Royalty income - - 270 2,479 2,470
------ ------ ------ ------ ------
Total revenue 23,625 28,128 23,103 17,594 18,041
Costs and expenses:
Cost of sales 10,870 13,640 12,782 9,803 11,739
------ ------ ------ ------ ------
Gross margin 12,755 14,488 10,321 7,791 6,302
Expenses:
Selling, general and
administrative 10,254 10,346 10,162 5,016 6,040
Research and development 2,589 2,434 2,979 2,442 1,701
Research and development,
DelSite - - - - 1,879
Research and development,
Aliminase[TM] clinical trial
expenses - 2,866 623 - -
Charges related to ACI and
Aloe & Herbs 1,750 - - - -
Charges related to Oregon
Freeze Dry, Inc. - 1,042 223 - -
Interest expense (income), net (233) (105) (80) (32) 19
Other expense (income), net - (62) (110) (13) 41
------ ------ ------ ------ ------
Income (loss) before income taxes (1,605) (2,033) (3,476) 378 (3,378)
Provision for income taxes 10 - - - -
------ ------ ------ ------ ------
Net income (loss) $(1,615) $(2,033) $(3,476) $ 378 $(3,378)
====== ====== ====== ====== ======
Net income (loss) per common share
- basic and diluted(1) $ (0.17) $ (0.22) $ (0.36) $ 0.04 $ (0.34)
====== ====== ====== ====== ======
Weighted average shares used in
per share computations 9,320 9,376 9,545 9,743 9,889
BALANCE SHEET INFORMATION (as of December 31):
Working capital $ 9,716 $ 7,911 $ 6,275 $ 6,315 $ 3,989
Total assets 24,247 23,493 20,702 21,217 22,159
Total shareholders' investment 21,363 19,504 16,440 16,929 13,689
(1) For a description of the calculation of basic and diluted net income
(loss) per share, see Note Twelve to the consolidated financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
Background
----------
The Company is a research-based biopharmaceutical, medical device, raw
materials and nutraceutical company engaged in the development,
manufacturing and marketing of naturally-derived complex carbohydrates and
other natural product therapeutics for the treatment of major illnesses, the
dressing and management of wounds and nutritional supplements. The Company
is comprised of two business segments. See Note Thirteen to the unaudited
condensed consolidated financial statements for financial information about
these business segments. The Company sells prescription and nonprescription
human and veterinary products through its Medical Services Division.
Through Caraloe, Inc., its consumer products subsidiary, the Company sells
consumer and bulk raw material products and also provides product
development and manufacturing services to customers in the cosmetic,
nutraceutical and medical markets. The Company's research and product
portfolio are based primarily on complex carbohydrates isolated from the
Aloe vera L. plant.
In October 2001, the Company incorporated, a wholly-owned subsidiary named
DelSite Biotechnologies, Inc. ("DelSite"). DelSite operates independently
from the Company's research and development program and is responsible for
the research, development and marketing of the Company's proprietary
GelSite[TM] technology for controlled release and delivery of bioactive
pharmaceutical ingredients.
Liquidity and Capital Resources
-------------------------------
At December 31, 2002 and 2001, the Company held cash and cash equivalents of
$3,636,000 and $3,454,000, respectively, an increase of $182,000. Net cash
used in operating activities in 2002 was $1,365,000, as compared to cash
provided by operating activities in 2001 of $1,275,000. The Company
received royalty payments totaling $2,875,000 in 2002 under its licensing
agreement with Medline. In addition, the Company received an advance on
future royalty payments due from Medline of $2.0 million which was recorded
in the Company's financial statements as a loan to be repaid in quarterly
installments through September 2005. See Part I for discussions regarding
agreements with Medline. Significant cash outflows during 2002 included a
$378,000 investment in property and equipment and $1.0 million for the
acquisition of the custom division of CBI. Customers with significant
accounts receivable balances at the end of 2002 included Mannatech, Inc.
($1,320,000) and Medline Industries ($610,000), and of these amounts,
$1,864,000 has been collected as of February 28, 2003.
In March 2003 the Company received a loan of $500,000 from Bancredito, a
Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is U.S. Prime
Rate plus 2.0%. The loan is secured by a mortgage on an unused, 164-acre
parcel of land owned by the Company in Costa Rica plus a lien on specified
oral patch production equipment. The proceeds of the loan will be used in
the Company's operations.
The Company had no additional material capital commitments as of that date
other than its leases and agreements with suppliers.
In July 1998 the Company provided a $187,000 cash advance to Rancho Aloe,
which is evidenced by a note receivable, due in installments, with payments
being made monthly based upon farm production. The Company also advanced
$300,000 to Aloe & Herbs in November 1998 for the acquisition of an
irrigation system to improve production on the farm and allow harvesting of
leaves year-round. The Company was also granted a five-year warrant to
purchase 300,000 shares of common stock of Aloe & Herbs. In the fourth
quarter of 1998, the Company fully reserved all amounts owed to it by Aloe &
Herbs, in the total amount of $487,000, due to the start-up nature of the
business. In 2002, the Company received payments totaling $19,000 from Aloe
& Herbs against the amount due.
In November 1997, the Company entered into a financing arrangement with
Comerica Bank-Texas ("Comerica"). The arrangement was composed of a
$3,000,000 line of credit structured as a demand note without a stated
maturity date and with an interest rate equal to the Comerica prime rate.
The line of credit is collateralized by the Company's accounts receivable
and inventory. This credit facility is used for operating needs, as
required. In October 2002, the Company entered into a credit agreement with
Comerica which further defined the credit arrangement, including certain
covenants. As of December 31, 2002, the Company was in compliance with all
such covenants. As of December 31, 2002, there was a $1,587,000 balance
owed to Comerica under the terms of the financing agreement.
In December 2002, the Company entered into an agreement with Medline for
accelerated payment of $2.0 million of the royalties due under the
Distributor and License Agreement. The royalty acceleration agreement
provides for each of the remaining quarterly royalty payments due to be paid
to the Company by Medline to be reduced by equal amounts, the sum of which
offsets the royalty advance. In addition, the Company will pay Medline
interest on the advance at the rate of 6.5% per year on the outstanding
balance of the advance. The Company has accounted for this transaction in
its financial statement as if it were a loan.
In December 2002, the Company acquired the assets of the custom division of
Cosmetic Beauty Innovations (CBI) for $1.0 million plus a royalty on the
Company's sales to custom division customers for five years and up to
$700,000 for useable inventories. The CBI custom division provided product
development and manufacturing services to customers in the cosmetic and skin
care markets. Included in the purchase were intellectual property, certain
inventories and specified pieces of equipment. The Company will provide
services to these customers through the Caraloe, Inc. development and
manufacturing services group. The Company began producing products for the
transferring CBI customers in February 2003 at its Irving, Texas facility.
The Company is seeking approximately $1.0 million in additional financing to
be used as working capital in 2003 and 2004. The Company anticipates that
such borrowings, together with the expected cash flows from operations, will
provide the funds necessary to finance its current operations, including
expected levels of research and development. However, the Company does not
expect that its current cash resources will be sufficient to finance future
major clinical studies and costs of filing new drug applications necessary
to develop its products to their full commercial potential. Additional
funds, therefore, may need to be raised through equity offerings,
borrowings, licensing arrangements or other means, and there is no assurance
that the Company will be able to obtain such funds on satisfactory terms
when they are needed.
In March 2001, the Board of Directors authorized the Company to repurchase
up to one million shares of its outstanding Common Stock. See "Market for
Registrant's Common Equity and Related Stockholder Matters" above. The
Company believes it has the financial resources necessary to repurchase
shares from time to time pursuant to the Board's repurchase authorization.
The Company is subject to regulation by numerous governmental authorities in
the United States and other countries. Certain of the Company's proposed
products will require governmental approval prior to commercial use. The
approval process applicable to pharmaceutical products and therapeutic
agents usually takes several years and typically requires substantial
expenditures. The Company and any licensees may encounter significant
delays or excessive costs in their respective efforts to secure necessary
approvals. Future United States or foreign legislative or administrative
acts could also prevent or delay regulatory approval of the Company's or any
licensees' products. Failure to obtain requisite governmental approvals or
failure to obtain approvals of the scope requested could delay or preclude
the Company or any licensees from marketing their products, or could limit
the commercial use of the products, and thereby have a material adverse
effect on the Company's liquidity and financial condition.
Results of Operations
---------------------
Fiscal 2002 Compared to Fiscal 2001
-----------------------------------
Total revenues were $18,041,000 in 2002, compared with $17,594,000 in 2001.
Total sales in the Company's Medical Services Division were $8,394,000 in
2002 as compared to $10,400,000 in 2001 and total sales in the Company's
Caraloe, Inc. subsidiary were $9,647,000 in 2002 as compared to $7,194,000
in 2001.
Total sales of the Company's wound and skin care products in 2002 were
$5,855,000 as compared with $7,921,000 in 2001. The decrease in wound care
revenue was primarily due to a $2.2 million decrease in orders from Medline,
the Company's exclusive domestic distributor. A portion of the decrease can
be attributed to initial stocking orders made by Medline in early 2001, as
the distribution agreement was implemented. Additionally, the Company's
products are facing increasing competitive pressure from low-end, commodity-
type products which is eroding its market share. Educational efforts are
underway to support the distributors sales efforts in product
differentiation, performance and net cost of therapy to the customer. The
Company has also initiated selective advertisements to support its brand.
Partially offsetting the decrease in domestic wound care sales was an
increase in sales to international customers. The Company sells its wound
care products to international distributors, primarily in Europe and Central
and South America. Total international wound care sales in 2002 were
$534,000 as compared to $386,000 in 2001, with the increase primarily due to
increased sales in Latin America.
Sales of the Company's oral technology products decreased from $129,000 in
2001 to $56,000 in 2002 due primarily to the loading of inventory by a
significant international customer in 2001.
The Company recorded royalty revenue in 2002 of $2,470,000 relating to the
exclusive Licensing and Distribution agreement with Medline as compared to
$2,479,000 in 2001.
Of the total Caraloe, Inc. sales in 2002, $6,493,000 was related to the sale
of bulk Manapol[R] powder. Caraloe currently sells bulk Manapol[R] powder
to a major customer under a three-year, non-exclusive supply and licensing
agreement. The current agreement expires in August 2003. Sales to this
customer increased from $5,192,000 in 2001 to $6,366,000 in 2002.
Caraloe also sells its AloeCeuticals[R] line of immune-enhancing dietary
supplements containing Manapol[R], which are available in liquid, capsule
and tablet forms. These products are sold directly to health and nutrition
stores and broker/distributors. They are also sold through the Company's
Internet sites. Sales of these products in 2001 and 2002 totaled $538,000
and $532,000, respectively.
Caraloe continued to develop its contract manufacturing business during
2002. Caraloe manufactures a variety of products that can be filled using
the Company's current equipment including gels, creams, lotions and drinks.
Total contract manufacturing sales in 2002 were $2,622,000 compared with
$1,144,000 in 2001. Of the $1,478,000 increase, $845,000 was attributable
to products the Company produced for Medline under a supply agreement
entered into in December 2000, whereby the Company manufactures Medline's
own branded skin care products for them on a contract basis.
Cost of goods sold increased from $9,803,000 in 2001 to $11,739,000 in 2002,
or 19.7%. As a percentage of sales, cost of sales increased from 55.7% to
65.1%. The increase in the cost of goods sold percentage was largely
attributable to a significant shift in sales mix toward lower margin
contract manufactured products. The Company experienced significant
unfavorable variances associated with its manufacturing processes in its
Irving, Texas facility due to lower manufacturing volumes associated with
the decrease in its wound care sales. The Company also experienced
significant unfavorable variances associated with its manufacturing
processes in its Costa Rica facility due to lower manufacturing volumes for
Manapol[R] powder through much of the year. Increased sales of Manapol[R]
powder in the fourth quarter of 2002 prompted the Company to increase its
production of Manapol[R] at the end of the year, thereby eliminating the
unfavorable variances through the first quarter of 2003.
Selling, general and administrative expenses ("SG&A") increased to
$6,040,000 from $5,016,000, or 20.4%. The 2001 balance included a one-time
favorable adjustment of $211,000 to reduce the Company's franchise tax
liability. The Company recorded additional distribution expenses in 2002 of
$285,000, which was primarily due to increased shipping volume and increased
facility costs associated with the distribution facility leased in October
2001. The Company recorded additional selling expense in 2002 of $201,000,
primarily in the areas of salaries, travel, literature and advertising, in
support of efforts to grow total sales. The Company also recorded
additional administrative expenses in 2002 of $327,000, primarily in the
areas of information systems, training, professional fees and travel as part
of an effort to improve the infrastructure of the Company and position it
for future growth.
Research and development ("R&D") expenses in support of the Company's
ongoing operations decreased to $1,701,000 in 2002 from $2,442,000 in 2001,
or 30.3%. This decrease resulted from the Company's efforts to refocus the
activities of this group toward services in support of manufacturing,
including formulation design, formulation modifications and re-engineering,
technology transfer to the manufacturing suite and stability studies.
DelSite operates independently from the Company's research and development
program and is responsible for the research, development and marketing of
the Company's proprietary Gelsite[TM] technology for controlled release and
delivery of bioactive pharmaceutical ingredients. DelSite began operations
in January 2002 and its expenses in support of this mission totaled
$1,879,000 in 2002. Combined research and development expenses totaled
$3,580,000 in 2002, an increase of 46.6% over 2001.
Net interest expense of $41,000 was recorded in 2002 versus net interest
income of $32,000 in 2001, with the variance primarily due to lower interest
rates earned on investments in 2002 and increased Company borrowings.
There was no provision for income taxes in 2002 due to the Company's
utilization of net operating loss carryforwards. The Company has provided a
valuation allowance against all deferred tax asset balances at December 31,
2002 and 2001 due to uncertainty regarding realization of the asset.
The Company's net loss for 2002 was $3,378,000, versus a net income of
$378,000 for 2001. The 2002 net loss was due to reduced gross margins
resulting from the mix of products sold and from plant operating variances,
as well as additional operating expenses incurred in defense of litigation
and in support of positioning business for future growth. Results in 2001
benefited from higher unit volume sales of wound care products, lower
production costs and a one time gain of $211,000 from adjustments to
franchise tax liabilities booked in prior periods. The loss per share in
2002 was $0.34, compared to earnings per share of $0.04 in 2001.
Fiscal 2001 Compared to Fiscal 2000
-----------------------------------
Total revenues were $17,594,000 in 2001, compared with $23,103,000 in 2000.
Total sales of the Company's wound and skin care products in 2001 were
$7,921,000 as compared to $11,971,000 in 2000. The decrease in wound and
skin care revenue was primarily effected by the distribution agreement with
Medline which significantly lowered the Company's selling prices for these
products in exchange for Medline assuming all of the selling, marketing and
distribution activities and the related costs, and paying the Company a
royalty. The Company recorded royalty income of $2.5 million in 2001
related to this agreement. Partially offsetting this revenue reduction due
to pricing was a 10% increase in unit volume in 2001 as compared to 2000.
The Company also sells products to international distributors, primarily in
Europe, and Central and South America. Total international sales in 2001
were $1,315,000 as compared to $1,343,000 in 2000. Included in the 2001
amount were sales of $386,000 of wound care products, which was a decrease
of $153,000 from 2000.
Sales of the Company's oral technology products increased from $68,000 in
2000 to $129,000 in 2001 because of significantly increased sales of the
product to an international customer. Included in this line are products
for the management of oral mucositis/stomatitis and oral lesions and ulcers.
Of the 2001 total Caraloe sales, $5,367,000 was related to the sale of bulk
Manapol[R] powder. Caraloe currently sells bulk Manapol[R] powder to a major
customer under a three-year, non-exclusive supply and licensing agreement.
The current agreement has been extended and expires in August 2003. Sales
to this customer decreased from $8,794,000 in 2000 to $5,192,000 in 2001.
In July 1999, Caraloe launched its new AloeCeuticals[R] line of immune-
enhancing dietary supplements containing Manapol[R], which are available in
liquid, capsule and tablet forms. These products are sold directly to
health and nutrition stores and broker/distributors. They are also sold
through the Company's Internet sites. Sales of these products in 2000 and
2001 totaled $446,000 and $538,000, respectively.
Caraloe also continued to develop its contract manufacturing business during
2001. Caraloe manufactures a variety of products that can be filled using
the Company's current equipment including gels, creams, lotions and drinks.
Total contract manufacturing sales in 2001 were $1,144,000 compared with
$779,000 in 2000.
Cost of sales decreased from $12,782,000 in 2000 to $9,803,000 in 2001, or
23.3%. As a percentage of sales, cost of sales increased from 55.3% to
55.7%. The increase in the cost of goods sold percentage was largely
attributable to lower wound care pricing as a result of the distribution
agreement with Medline. Offsetting this was a change in product mix caused
by the decline in lower margin Manapol[R] sales as well as increased
efficiency in the operation of the Company's manufacturing plant in the
United States.
Selling, general and administrative expenses ("SG&A") decreased to
$5,016,000 from $10,162,000, or 50.6%. Included in this decrease was a
$4,550,000 reduction in selling and marketing expenses for wound care
products directly related to the Medline Agreement and Medline's acquisition
of the Company's sales force that existed on December 1, 2000.
Additionally, the Company took advantage of the reduced administrative
burdens of supporting the sales force by reducing costs in all departments
affected by the reduction in sales personnel. The Company also recorded a
one-time favorable adjustment of $211,000 to adjust its accrued franchise
tax liability to actual.
Research and development ("R&D") expenses decreased to $2,442,000 in 2001
from $3,602,000 in 2000, or 32.2%. This decrease was primarily the result
of a reduction of $623,000 in expenditures for the unsuccessful
Aliminase[TM] clinical trial as well as refocusing efforts and priorities
within the department. The Company continued its efforts in basic research
during 2001, including work on a new and unique complex carbohydrate
(CR1013) which has potential near-term utility in the area of drug delivery.
Also included in total R&D activities during 2001 were various small
clinical trials designed to collect data in support of the Company's
products.
Net interest income of $32,000 was realized in 2001 versus $80,000 in 2000,
with the variance primarily due to lower interest rates in 2001.
There was no provision for income taxes in 2001 due to the Company's
utilization of net operating loss carryforwards. The Company has provided a
valuation allowance against all deferred tax asset balances at December 31,
2001 and 2000 due to uncertainty regarding realization of the asset.
The Company's net income for 2001 was $378,000, versus a net loss of
$3,476,000 for 2000. The 2001 net income was due to the operating
efficiencies occurring as a result of the distribution agreement with
Medline Industries, lower production costs as well as increased unit sales
in 2001 of the Company's wound and skin care products. 2001 results
benefited from a one time gain of $200,000 from adjustments to state tax
liabilities booked in prior periods. The loss in 2000 was primarily
attributable to lower selling prices for wound care products and lower
volumes of Manapol[R] sales, high selling and marketing costs for wound care
products and final costs for the Aliminase Clinical Trial. The net income
per share was $0.04 in 2001, compared to a net loss per share of $0.36 in
2000.
Impact of Inflation
-------------------
The Company does not believe that inflation has had a material impact on its
results of operations.
Critical Accounting Policies
----------------------------
Management has identified the following accounting policies as critical. The
Company's accounting policies are more fully described in Note Two of the
Financial Statements. The preparation of consolidated financial statements
requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to revenues,
product returns, bad debts and inventories. The Company bases its estimates
on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company records estimated reductions to revenue for incentive offerings
including promotions and other volume-based incentives as well as estimates
for returns based upon recent history. If market conditions were to decline
or inventory was in danger of expiring or becoming obsolete, the Company may
take actions to increase customer incentive offerings possibly resulting in
an incremental reduction of revenue at the time the incentive is offered.
Additionally, if demand for the Company's product were to drop, the
Company's distributors may request return of product for credit causing a
need to re-evaluate and possibly increase the reserve for product returns.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Forward Looking Statements
--------------------------
All statements other than statements of historical fact contained in this
report, including but not limited to statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations
(and similar statements contained in the Notes to Consolidated Financial
Statements) concerning the Company's financial position, liquidity, capital
resources and results of operations, its prospects for the future and other
matters, are forward-looking statements. Forward-looking statements in this
report generally include or are accompanied by words such as "anticipate",
"believe", "estimate", "expect", "intend", "will", "would", "should" or
words of similar import. Such forward-looking statements include, but are
not limited to, statements regarding the ability of local suppliers of Aloe
vera L. leaves in Costa Rica to supply the Company's need for leaves; the
condition, capacity and adequacy of the Company's manufacturing and
laboratory facilities and equipment; the adequacy of the protection that the
Company's patents provide to the conduct of its business operations; the
adequacy of the Company's protection of its trade secrets and unpatented
proprietary know-how; the Company's belief that the claims of the Plaintiffs
identified under Item 3 of Part I of this report are without merit; the
adequacy of the Company's cash resources and cash flow from operations to
finance its current operations; and the Company's intention, plan or ability
to repurchase shares of its outstanding Common Stock, to initiate, continue
or complete clinical and other research programs, to obtain financing when
it is needed, to fund its operations from revenue and other available cash
resources, to enter into licensing agreements, to develop and market new
products and increase sales of existing products, to obtain government
approval to market new products, to file additional patent applications, to
rely on trade secrets, unpatented proprietary know-how and technological
innovation, to reach satisfactory resolutions of its disputes with third
parties, to reach a satisfactory agreement with its supplier of freeze-dried
products, to acquire sufficient quantities of Aloe vera L. leaves from local
suppliers at significant savings, to collect the amounts owed to it by its
distributors, customers and other third parties, and to use its tax loss
carryforwards before they expire, as well as various other matters.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, no assurance can be given that
such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements include but are not limited to the possibilities
that the Company may be unable to obtain the funds needed to carry out large
scale clinical trials and other research and development projects, that the
results of the Company's clinical trials may not be sufficiently positive to
warrant continued development and marketing of the products tested, that new
products may not receive required approvals by the appropriate government
agencies or may not meet with adequate customer acceptance, that the Company
may not be able to obtain financing when needed, that the Company may not be
able to obtain appropriate licensing agreements for products that it wishes
to market or products that it needs assistance in developing, that the
Company's efforts to improve its sales and reduce its costs may not be
sufficient to enable it to fund its operating costs from revenues and
available cash resources, that one or more of the customers that the Company
expects to purchase significant quantities of products from the Company or
Caraloe may fail to do so, that competitive pressures may require the
Company to lower the prices of or increase the discounts on its products,
that the Company's sales of products it is contractually obligated to
purchase from suppliers may not be sufficient to enable and justify its
fulfillment of those contractual purchase obligations, that other parties
who owe the Company substantial amounts of money may be unable to pay what
they owe the Company, that the Company's patents may not provide the Company
with adequate protection, that the Company's manufacturing facilities may be
inadequate to meet demand, that the Company's distributors may be unable to
market the Company's products successfully, that the Company may not be able
to resolve its disputes with third parties in a satisfactory manner, that
the Company may be unable to reach a satisfactory agreement with its
supplier of freeze-dried products or with other important suppliers, that
the Company may not be able to use its tax loss carryforwards before they
expire, that the Company may not have sufficient financial resources
necessary to repurchase shares of its outstanding Common Stock, and that the
Company may be unable to produce or obtain, or may have to pay excessive
prices for, the raw materials or products it needs.
All forward-looking statements in this report are expressly qualified in
their entirety by the cautionary statements in the two immediately preceding
paragraphs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Foreign Currency
----------------
The Company's manufacturing operation in Costa Rica accounted for 37.5% of
cost of sales for the year ended December 31, 2002. As a result, the
Company's financial results could be significantly affected by factors such
as changes in foreign currency exchange rates or economic conditions in
Costa Rica. When the U.S. Dollar strengthens against the Costa Rica Colon,
the cost of sales decreases. During 2002, the exchange rate from U.S.
Dollars to Costa Rica Colones increased by 11.3% to 340 at December 31,
2002. The effect of an additional 10% strengthening in the value of the
U.S. Dollar relative to the Costa Rica Colones in 2002 would have resulted
in an increase of $66,300 in gross profit. The Company's sensitivity
analysis of the effects of changes in foreign currency rates does not factor
in a potential change in sales levels or local currency prices.
Sales of products to foreign markets comprised 7.9% of sales for 2002.
These sales are generally denominated in U.S. Dollars. The Company does not
believe that changes in foreign currency exchange rates or weak economic
conditions in foreign markets in which the Company distributes its products
would have a significant effect on operating results. If sales to foreign
markets increase in future periods, the effects could become significant.
For quantitative and qualitative disclosures about market risk related to
the supply of Aloe vera L. leaves, see "Business."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The response to Item 8 is submitted as a separate section of this Form 10-K.
See Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
There were no changes in or disagreements with the Company's independent
public accountants on accounting matters or financial disclosure.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by Item 10 of Form 10-K is hereby incorporated by
reference from the information appearing under the captions "Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement relating
to its 2002 annual meeting of shareholders, which will be filed pursuant to
Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by Item 11 of Form 10-K is hereby incorporated by
reference from the information appearing under the caption "Executive
Compensation" in the Company's definitive Proxy Statement relating to its
2003 annual meeting of shareholders, which will be filed pursuant to
Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information required by Item 12 of Form 10-K is hereby incorporated by
reference from the information appearing under the captions "Security
Ownership of Management" and "Principal Shareholders" in the Company's
definitive Proxy Statement relating to its 2002 annual meeting of
shareholders, which will be filed pursuant to Regulation 14A within 120 days
after the Company's fiscal year ended December 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information, if any, required by Item 13 of Form 10-K is hereby
incorporated by reference from the information appearing under the caption
"Certain Transactions", if any, in the Company's definitive Proxy Statement
relating to its 2003 annual meeting of shareholders, which will be filed
pursuant to Regulation 14A within 120 days after the Company's fiscal year
ended December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
With the participation of management, the Company's Chief Executive Officer
and its Chief Financial Officer evaluated the Company's disclosure controls
and procedures within 90 days of the filing of this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures have been
designed and are being operated in a manner that provides reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within an
entity have been detected. Subsequent to the date of the most recent
evaluation of the Company's internal controls, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------
(a)(1) Financial Statements.
Reference is made to the index on page F-1 for a list of all
financial statements filed as a part of this Annual Report.
(2) Financial Statement Schedules.
Reference is made to the index on page F-1 for a list of one
financial statement schedule filed as a part of this Annual
Report.
(3) Exhibits.
Reference is made to the Index to Exhibits on pages E-1 through
E-7 for a list of all exhibits to this report.
(b) Reports on Form 8-K.
The Company filed a Form 8-K Report dated December 23, 2002, to
report the Acquisition of certain assets of the Custom Division
of Creative Beauty Innovations, Inc.
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets --
December 31, 2001 and 2002 F - 2
Consolidated Statements of Operations -- years ended
December 31, 2000, 2001 and 2002 F - 3
Consolidated Statements of Shareholders' Equity --
years ended December 31, 2000, 2001 and 2002 F - 4
Consolidated Statements of Cash Flows -- years ended
December 31, 2000, 2001 and 2002 F - 5
Notes to Consolidated Financial Statements F - 6
Financial Statement Schedule
Valuation and Qualifying Accounts F - 17
Report of Ernst & Young LLP, Independent Auditors F - 18
Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)
December 31,
2001 2002
------- -------
Assets:
Current Assets:
Cash and cash equivalents $ 3,454 $ 3,636
Accounts receivable, net of allowance for
doubtful accounts of $100 and $110 December 31,
2001 and 2002, respectively 1,622 2,370
Inventories, net 5,338 4,333
Prepaid expenses 189 603
------- -------
Total current assets 10,603 10,942
Property, plant and equipment, net 10,404 10,065
Customer relationships, net - 893
Other assets, net 210 259
------- -------
Total assets $ 21,217 $ 22,159
======= =======
Liabilities and Stockholders' Equity:
Current Liabilities:
Line of credit $ 763 $ 1,587
Accounts payable 1,099 1,458
Accrued liabilities 884 1,256
Current portion of long-term debt and
capital lease obligations - 730
Deferred revenue 1,542 1,922
------- -------
Total current liabilities 4,288 6,953
Long-term debt and capital lease obligations - 1,517
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
authorized, 9,809,087 and 9,967,938 shares
issued at December 31, 2001 and 2002,
respectively 98 100
Capital in excess of par value 52,429 52,568
Accumulated Deficit (35,598) (38,976)
Treasury stock at cost, 0 and 2,400 shares at
December 31, 2001 and 2002, respectively - (3)
------- -------
Total stockholders' equity 16,929 13,689
------- -------
Total liabilities and stockholders' equity $ 21,217 $22,159
======= =======
The accompanying notes are an integral part of these balance sheets.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Years Ended December 31,
-----------------------------
2000 2001 2002
------ ------ ------
Revenues:
Net product sales $22,833 $15,115 $15,571
Royalty income 270 2,479 2,470
------ ------ ------
Total revenues 23,103 17,594 18,041
Cost of sales 12,782 9,803 11,739
------ ------ ------
Gross margin 10,321 7,791 6,302
Expenses:
Selling, general and administrative 10,162 5,016 6,040
Research and development 2,979 2,442 1,701
Research and development, DelSite - - 1,879
Research and development,
Aliminase[TM] clinical trial expenses 623 - -
Charges related to Oregon Freeze Dry,
Inc. 223 - -
Other expense (income) (110) (13) 19
Interest expense (income), net (80) (32) 41
------ ------ ------
Net income (loss) before income taxes (3,476) 378 (3,378)
Provision for income taxes - - -
------ ------ ------
Net income (loss) $(3,476) $ 378 $(3,378)
====== ====== ======
Basic and diluted earnings (loss) per
share $ (0.36) $ 0.04 $ (0.34)
====== ====== ======
Basic and diluted average shares
outstanding 9,545 9,743 9,889
====== ====== ======
The accompanying notes are an integral part of these statements.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2000, 2001 and 2002
(Amounts in thousands)
Common Stock Capital in Treasury Stock
-------------- Excess of Accumulated --------------
Shares Amount Par Value Deficit Shares Amount Total
------ ----- ------ ------- ------ ----- ------
January 1, 2000 9,395 $ 94 $51,910 $(32,500) - $ - $19,504
Issuance of common
stock for employee
stock purchase plan 170 2 173 - - - 175
Issuance of common
stock for stock
option plan 94 1 236 - - - 237
Net loss - - - (3,476) - - (3,476)
------ ----- ------ ------- ----- ----- ------
December 31, 2000 9,659 97 52,319 (35,976) - - 16,440
Issuance of common
stock for employee
stock purchase plan 150 1 110 - - - 111
Net income - - - 378 - - 378
------ ----- ------ ------- ----- ----- ------
December 31, 2001 9,809 98 52,429 (35,598) - - 16,929
Issuance of common
stock for employee
stock purchase plan 149 2 126 - - - 128
Issuance of common
stock for stock
option plan 10 - 13 - - - 13
Treasury stock
purchase - - - - 2 (3) (3)
Net loss - - - (3,378) - - (3,378)
------ ----- ------ ------- ----- ----- ------
December 31, 2002 9,968 $ 100 $52,568 $(38,976) 2 $ (3) $13,689
====== ===== ====== ======= ===== ===== ======
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended December 31,
---------------------------
2000 2001 2002
------ ------ ------
Operating activities:
Net income (loss) $(3,476) $ 378 $(3,378)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision for bad debts 116 55 38
Provision for inventory obsolescence 316 91 135
Depreciation and amortization 1,043 1,050 1,087
Loss on disposal of assets 65 - 21
Charge related to Oregon Freeze Dry, Inc. 223 - -
Changes in operating assets and liabilities:
Accounts receivable, net 1,392 504 (786)
Inventories 294 (706) 870
Prepaid expenses 390 (6) (414)
Other assets 515 (117) (49)
Accounts payable and accrued liabilities (1,328) (849) 731
Deferred revenue 667 875 380
------ ------ ------
Net cash provided by (used in) operating
activities 217 1,275 (1,365)
Investing activities:
Cash paid in purchase of business, net of
cash acquired - - (1,001)
Purchases of property, plant and equipment (445) (1,132) (378)
------ ------ ------
Net cash used in investing activities (445) (1,132) (1,379)
Financing activities:
Borrowings on line of credit 563 - 824
Proceeds from debt issuances - - 2,000
Principal payments on debt and capital
lease obligations - - (36)
Issuances of common stock 412 111 141
Treasury stock purchased - - (3)
------ ------ ------
Net cash provided by financing activities 975 111 2,926
------ ------ ------
Net increase in cash and cash equivalents 747 254 182
Cash and cash equivalents at beginning of year 2,453 3,200 3,454
------ ------ ------
Cash and cash equivalents at end of year $ 3,200 $ 3,454 $ 3,636
====== ====== ======
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year for interest $ 40 $ 58 $ 61
Cash paid during the year for income taxes - - -
The accompanying notes are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. BUSINESS
Carrington Laboratories, Inc. (the "Company") is a research-based
biopharmaceutical, medical device, raw materials and nutraceutical company
engaged in the development, manufacturing and marketing of naturally-derived
complex carbohydrates and other natural product therapeutics for the
treatment of major illnesses, the dressing and management of wounds and
nutritional supplements.
The Company's Medical Services Division offers a comprehensive line of wound
management products to hospitals, alternative care facilities, cancer
centers and the home health care market. The Company and Medline
Industries, Inc. ("Medline") entered into a Distributor and License
Agreement dated November 3, 2000, under which the Company granted to Medline
the exclusive right, subject to certain limited exceptions, to distribute
all of the Company's wound and skin care products (the "Products") in the
United States, Canada, Puerto Rico and the Virgin Islands for a term of five
years that began December 1, 2000. The agreement provides that Carrington
will continue to manufacture its existing line of Products and sell them to
Medline at specified prices. The prices, which are generally firm for the
first two years of the contract term, are thereafter subject to adjustment
not more than once each year to reflect increases in manufacturing cost.
The agreement also grants Medline a nonexclusive license to use certain of
the Company's trademarks in connection with the marketing of the Products.
In addition, it permits Medline, if it so elects, to use those trademarks in
connection with the marketing of various Medline products and other products
not manufactured by the Company (collectively, "Other Products").
The agreement requires Medline to pay the Company a base royalty totaling
$12,500,000 in quarterly installments that began on December 1, 2000. In
addition to the base royalty, if Medline elects to market any of the Other
Products under any of the Company's trademarks, Medline must pay the Company
a royalty of between one percent and five percent of Medline's aggregate
annual net sales of the Products and the Other Products, depending on the
amount of the net sales, except that the royalty on certain high volume
commodity products will be two percent.
Caraloe, Inc., a subsidiary, markets or licenses consumer products and bulk
raw material products. Principal sales of Caraloe, Inc., are bulk raw
material products which are sold to United States manufacturers who include
the high quality extracts from Aloe vera L. in their finished products.
Caraloe also provides product development and manufacturing services to
Customers in the cosmetic, nutraceutical and medical markets.
The Company formed a subsidiary, DelSite Biotechnologies, Inc., in October
2001 as a vehicle to further the development and commercialization of its
new proprietary complex carbohydrate (Gelsite[TM] polymer) that the Company
is developing for use as a drug and vaccine delivery system.
In December 2002 the Company entered into an agreement to acquire certain
assets of the Custom Division of Creative Beauty Innovations, Inc. ("CBI"),
including specialized manufacturing customer information, intellectual
property and equipment. CBI is a privately held manufacturer of skin and
cosmetic products with operations in Carrollton, Texas.
Under the agreement, the Company paid CBI $501,000 at closing and deposited
$500,000 in escrow, which was released to CBI on February 28, 2003. In
addition, Carrington agreed (i) to purchase inventory of CBI for an amount
not greater than $700,000, to be paid six months after closing and (ii) to
pay CBI an amount equal to 9.0909% of Carrington's net sales up to $6.6
million per year and 8.5% of Carrington's net sales over $6.6 million per
year of CBI products to CBI's existing customers for the next five years.
The acquired assets include equipment and other physical property previously
used by CBI's Custom Division to compound and package cosmetic formulations
of liquids, creams, gels and lotions into bottles, tubes or cosmetic jars.
Carrington intends to use these assets in a substantially similar manner.
The Company will provide services to these customers through the Caraloe,
Inc. development and manufacturing services group. The Company recorded
$100,000 for the purchase of equipment and $901,000 for the purchase of
customer relationship intangibles in connection with the acquisition. No
inventory had been purchased as of December 31, 2002.
The Company's products are produced at its plants in Irving, Texas and Costa
Rica. A portion of the Aloe vera L. leaves used for manufacturing the
Company's products are grown on a Company-owned farm in Costa Rica. The
remaining leaves are purchased from other producers in Costa Rica.
NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Carrington Laboratories, Inc., and its subsidiaries, all of
which are wholly owned. All intercompany accounts and transactions have
been eliminated in consolidation.
CASH EQUIVALENTS. The Company's policy is that all highly liquid
investments purchased with a maturity of three months or less at date of
acquisition are considered to be cash equivalents unless otherwise
restricted.
INVENTORY. Inventories are recorded at the lower of cost (first-in, first-
out) or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are recorded
at cost less accumulated depreciation. Land improvements, buildings and
improvements, furniture and fixtures and machinery and equipment are
depreciated on the straight-line method over their estimated useful lives.
Leasehold improvements and equipment under capital leases are amortized over
the terms of the respective leases or the estimated lives of the assets,
whichever is less.
LONG-LIVED ASSETS. In October 2001, the Financial Accounting Standards
Board issued a Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FAS144).
The Company adopted FAS 144 on January 1, 2002. In accordance with FAS 144,
the Company reviews long-lived assets, including finite-lived intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and
carrying value of the asset. There have been no impairment charges recorded
in the years presented.
CUSTOMER RELATIONSHIPS. In connection with the CBI acquisition described in
Note One, the Company recorded a finite-lived intangible asset of $901,000
for customer relationships acquired. The Company will amortize this
intangible asset over five years, which is based on the estimated
contractual life of the agreement. Future amounts paid to the sellers based
on a percentage of sales of CBI products as described in Note One will be
recorded as an expense in the same period the corresponding sales are
recorded. The Company recorded amortization expense of $8,000 in 2002.
DEFERRED REVENUE. Deferred revenue is related to the licensing and royalty
agreement with Medline Industries and represents amounts received in excess
of amounts amortized to royalty income.
TRANSLATION OF FOREIGN CURRENCIES. The functional currency for
international operations (primarily Costa Rica) is the U.S. Dollar.
Accordingly, such foreign entities translate monetary assets and liabilities
at year-end exchange rates, while non-monetary items are translated at
historical rates. Revenue and expense accounts are translated at the
average rates in effect during the year, except for depreciation and
amortization, which are translated at historical rates. Translation
adjustments and transaction gains or losses are recognized in the
consolidated statement of operations in the year of occurrence.
REVENUE RECOGNITION. The Company recognizes revenue for product sales at
the time of shipment when title to the goods transfers and collectibility is
reasonably assured. Royalty income is recognized over the period of the
licensing and royalty agreement.
FEDERAL INCOME TAXES. The Company uses the liability method of accounting
for income taxes. Under this method, deferred income taxes are recorded to
reflect the tax consequences of differences between the tax basis of assets
and liabilities and the financial reporting basis. Valuation allowances are
provided against net deferred tax assets when it is more likely than not,
based on available evidence, that assets may not be realized.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred. Certain laboratory and test equipment determined to have
alternative future uses in other research and development activities has
been capitalized and is depreciated as research and development expense over
the life of the equipment.
ADVERTISING. Advertising expense is charged to operations in the year in
which such costs are incurred. Advertising expense has not been significant
for 2000, 2001 or 2002.
STOCK-BASED COMPENSATION. The Company accounts for employee stock options
in accordance with Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees and Financial Accounting Standards
Board Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25. Under APB 25,
the Company recognizes no compensation expense related to employee or
director stock options when options are granted with exercise prices at the
estimated fair value of the stock on the date of grant, as determined by the
Board of Directors.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS1 123), Accounting for Stock-
Based Compensation and Statement of Financial Accounting Standards No. 148
(FAS 148), Accounting for Stock-Based Compensation - Transition and
Disclosure - An Amendment of FASB Statement No. 123. Under the provisions
of FAS 123, pro forma compensation expense related to options issued to
employees is disclosed based on the fair value of options on the grant date.
The following table (in thousands) illustrates the effect on net loss if the
Company had applied the fair value recognition provision of FAS 123 to stock
based compensation:
--------------------------------------------------------------------------
2000 2001 2002
--------------------------------------------------------------------------
Net income (loss) (in thousands):
As reported $(3,476) $ 378 $(3,378)
Less: Stock-based compensation
expense determined under fair
value-based method (1,174) (461) (331)
------ ------ ------
Pro forma $(4,650) $ (83) $(3,709)
====== ====== ======
Net income (loss)
per share:
As reported $ (0.36) $ 0.04 $(0.34)
Pro forma $ (0.49) $(0.01) $(0.38)
--------------------------------------------------------------------------
Because options vest over a period of several years and additional awards
are generally made each year, the pro forma information presented above is
not necessarily indicative of the effects on reported or pro forma net
earnings or losses for future years.
The Company follows the provisions of FAS 123 and Emerging Issues Task Force
No. 96-19, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Connection with Selling Goods or Services, for
equity instruments granted to non-employees. The Company expenses the fair
value of these equity instruments over the respective vesting term.
NET INCOME (LOSS) PER SHARE. Basic net income (loss) per share is based on
the weighted average number of shares of common stock outstanding during the
year. Diluted net income (loss) per share includes the effects of options,
warrants and convertible securities unless the effect is antidilutive.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
NEW PRONOUNCEMENTS. In July 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 146 Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS 146"), which is
effective for exit or disposal activities initiated after December 31, 2002,
with earlier application encouraged. The Company does not anticipate any
impact on the results of operations or financial position from the adoption
of SFAS 146.
NOTE THREE. INVENTORIES
The following summarizes the components of inventory at December 31, 2001
and 2002, in thousands:
2001 2002
------------------------------------------------------------------
Raw materials and supplies $2,041 $1,776
Work-in-process 910 624
Finished goods 2,387 $1,933
------------------------------------------------------------------
Total $5,338 $4,333
------------------------------------------------------------------
The inventory balances are net of $516,000 and $632,000 of reserves for
obsolete and slow moving inventory at December 31, 2001 and 2002,
respectively.
NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2001 and 2002, in thousands:
Estimated
2001 2002 Useful Lives
------------------------------------------------------------------
Land and improvements $ 1,391 $1,391
Buildings and improvements 8,618 8,984 7 to 25 years
Furniture and fixtures 603 593 4 to 8 years
Machinery and equipment 7,800 8,094 3 to 10 years
Leasehold improvements 783 782 1 to 3 years
Equipment under capital leases 114 197 4 years
------------------------------------------------------------------
Total 19,309 20,041
Less accumulated depreciation
and amortization 8,905 9,976
------------------------------------------------------------------
Property, plant and
equipment, net $10,404 $10,065
------------------------------------------------------------------
The net book value of property, plant and equipment in Costa Rica at
December 31, 2001 and 2002 was $3,847,000 and $3,716,000, respectively.
NOTE FIVE. ACCRUED LIABILITIES
The following summarizes significant components of accrued liabilities at
December 31, 2001 and 2002, in thousands:
2001 2002
------------------------------------------------------------------
Accrued payroll $270 $343
Accrued insurance 81 81
Accrued taxes 230 278
Accrued professional fees 70 247
Other 233 307
------------------------------------------------------------------
Total $884 $1,256
------------------------------------------------------------------
NOTE SIX. LINE OF CREDIT
The Company has a line of credit with a bank that provides for borrowings of
up to $3 million based on the level of qualified accounts receivable and
inventory. The line of credit is collateralized by accounts receivable and
inventory. Borrowings under the line of credit bear interest at the bank's
prime rate (4.25% at December 31, 2002 plus 0.5%). The line of credit
requires the Company to maintain certain financial ratios and the Company
was in compliance with these requirements at December 31, 2002. As of
December 31, 2002 there was $1,587,000 outstanding on the credit line with
$433,000 credit available for operations.
NOTE SEVEN. LONG-TERM DEBT
Medline advanced the Company $2,000,000 on December 16, 2002. The amount
bears interest at 6.5% and will be repaid by reducing each quarterly royalty
payment due from Medline through September 2005 by $200,000.
The following summarizes annual maturities at December 31, 2002, in
thousands:
------------------------------------------------------------------
2003 $684
2004 734
2005 582
------------------------------------------------------------------
Total $2,000
------------------------------------------------------------------
NOTE EIGHT. COMMON STOCK
SHARE PURCHASE RIGHTS PLAN The Company has a share purchase rights plan
which provides, among other rights, for the purchase of common stock by
existing common stockholders at significantly discounted amounts in the
event a person or group acquires or announces the intent to acquire 15% or
more of the Company's common stock. The rights expire in 2011 and may be
redeemed at any time at the option of the Board of Directors for $.001 per
right.
EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan under which employees may purchase common stock at a price equal to the
lesser of 85% of the market price of the Company's common stock on the last
business day preceding the enrollment date (defined as January 1, April 1,
July 1 or October 1 of any plan year) or 85% of the market price on the last
business day of each month. A maximum of 1,000,000 shares of common stock
was reserved for purchase under this Plan. As of December 31, 2002, a total
of 625,000 shares had been purchased by employees at prices ranging from
$0.77 to $29.54 per share.
STOCK OPTIONS. The Company has an incentive stock option plan which was
approved by the shareholders in 1995 under which incentive stock options and
nonqualified stock options may be granted to employees, consultants and non-
employee directors. Options are granted at a price no less than the market
value of the shares on the date of the grant, except for incentive options
to employees who own more than 10% of the total voting power of the
Company's common stock, which must be granted at a price no less than 110%
of the market value. Employee options are normally granted for terms of 10
years. Options granted prior to December 1998 normally vested at the rate
of 25% per year beginning on the first anniversary of the grant date.
Options granted from December 1998 through March 2001 normally vested at the
rate of 33-1/3% per year beginning on the first anniversary of the grant
date, but certain options granted in December 1998, 1999 and 2001 were 25%,
50% or 100% vested on the grant date, with the remainder of each option
vesting in equal installments on the first, second and third anniversaries
of the grant date. Options granted subsequent to March 2001 normally vest
at the rate of 50% per year beginning on the first anniversary of the grant
date. Options to non-employee directors have terms of ten years and are 100%
vested on the grant date. The Company has reserved 2,250,000 shares of
common stock for issuance under this plan. As of December 31, 2002, options
to purchase 614,000 shares were available for future grants under the plan.
The following summarizes stock option activity for each of the three years
in the period ended December 31, 2002 (shares in thousands):
Weighted
Average
Exercise
Shares Price Per Share Price
-------------------------------------------------------------------
Balance, January 1, 2000 1,407 $ 2.06 to $28.75 $4.05
Granted 263 $ 1.31 to $ 2.03 $1.35
Lapsed or canceled (333) $ 2.06 to $28.75 $3.35
Exercised (94) $ 2.50 to $ 4.81 $2.58
-------------------------------------------------------------------
Balance, December 31, 2000 1,243 $ 1.31 to $28.75 $3.78
Granted 345 $ 1.05 to $ 1.37 $1.17
Lapsed or canceled (215) $ 1.25 to $27.00 $3.94
-------------------------------------------------------------------
Balance, December 31, 2001 1,373 $ 1.05 to $28.75 $3.11
Granted 381 $ 1.05 to $ 1.50 $1.28
Lapsed or canceled (227) $ 1.05 to $12.75 $3.62
Exercised (10) $ 1.31 to $ 2.06 $1.38
-------------------------------------------------------------------
Balance, December 31, 2002 1,517 $ 1.05 to $28.75 $2.58
-------------------------------------------------------------------
Options exercisable at
December 31, 2000 605 $ 2.03 to $28.75 $4.86
-------------------------------------------------------------------
Options exercisable at
December 31, 2001 902 $ 1.31 to $28.75 $3.78
-------------------------------------------------------------------
Options exercisable at
December 31, 2002 1,092 $ 1.05 to $28.75 $3.12
-------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------ -------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Shares Average
Range of (In Contractual Exercise (In Exercise
Exercise Prices thousands) Life Price thousands) Price
---------------------------------------------------------------------
$27.00 to $28.75 8 3.4 years $28.64 8 $28.64
$10.25 to $12.75 5 1.2 years $11.38 5 $11.38
$ 5.25 to $ 8.25 94 4.2 years $ 6.74 94 $ 6.74
$ 4.50 to $ 4.81 246 5.2 years $ 4.79 246 $ 4.79
$ 2.03 to $ 3.63 319 5.6 years $ 2.38 319 $ 2.38
$ 1.05 to $ 1.50 845 8.9 years $ 1.25 420 $ 1.31
----- -----
1,517 6.4 years $ 2.58 1,092 $ 3.12
===== =====
The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants to employees in 2000, 2001, and 2002,
respectively: risk-free interest rates of 5.99%, 5.09% and 3.00%; expected
dividend yields of 0%; expected volatility of 89.3%, 89.7% and 105.2% and
expected lives of 10 years for 2000 and 2001 and 5 years for 2002. The
weighted average fair values of options granted were $0.85, $0.84 and $1.00
in 2000, 2001, and 2002, respectively.
STOCK WARRANTS. From time to time, the Company has granted warrants to
purchase common stock to the Company's research consultants and other
persons rendering services to the Company. The exercise price of such
warrants was normally the market price or in excess of the market price of
the common stock at date of issuance. The following summarizes warrant
activity for each of the years in the period ending December 31, 2002
(shares in thousands):
Weighted
Average
Exercise
Shares Price Per Share Price
----------------------------------------------------------------
Balance, December 31, 1999,
2000 and 2001 55 $ 3.50 to $20.13 $ 5.01
Lapsed or canceled 5 $20.13 $20.13
----------------------------------------------------------------
Warrants exercisable at
December 31, 2002 50 $ 3.50 $ 3.50
----------------------------------------------------------------
Warrants outstanding at December 31, 2002 had a weighted average remaining
contractual life of 1.6 years.
COMMON STOCK RESERVED At December 31, 2002 the Company had reserved a total
of 2,556,000 common shares for future issuance relating to the employee
stock purchase plan, stock option plan and stock warrants disclosed above.
NOTE NINE. COMMITMENTS AND CONTINGENCIES
The Company conducts a significant portion of its operations from two
office/ warehouse/distribution facilities under operating leases. In
addition, the Company leases certain office equipment under operating leases
and certain manufacturing and transportation equipment under capital leases.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of December 31,
2002 were as follows, in thousands:
Capital Operating
Leases Leases
--------------------------------------------------------------------
2003 $ 62 $ 738
2004 64 770
2005 62 795
2006 64 778
2007 14 771
Thereafter 34 2,238
--------------------------------------------------------------------
Total minimum lease payments 300 $6,090
=====
Amounts representing interest (53)
-----
Present value of capital lease obligations 247
Less current portion of capital lease obligations (46)
-----
Obligations under capital lease agreements,
excluding the current portion $ 201
=====
Total rental expense under operating leases was $661,000, $666,000 and
$667,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
In 2000 the Company expensed $223,000 related to a 1995 commitment to
purchase freeze-dried products from Oregon Freeze Dried, Inc. The Company
had no further losses related to this commitment.
From time to time in the normal course of business, the Company is party
to various matters involving claims or possible litigation. Management
believes the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
The Company has outstanding a letter of credit in the amount of $800,000
which is used as security on the lease for the Company's laboratory and
warehouse facility. The Company has outstanding a letter of credit in the
amount of $100,000 which is used as security on a capital lease for
equipment.
NOTE TEN. INCOME TAXES
The tax effects of temporary differences that gave rise to deferred tax
assets and deferred tax liabilities at December 31, 2001 and 2002 were as
follows, in thousands:
2001 2002
---------------------------------------------------------------
Net operating loss carryforward $ 12,965 $14,282
Research and development
and other credits 478 254
Property, plant and equipment 340 333
Inventory 394 399
Other, net 78 92
Bad debt reserve 452 448
Deferred income 524 653
ACI Stock Valuation 204 204
Accrued liability 89 93
Less - Valuation allowance (15,524) (16,758)
------ ------
$ 0 $ 0
====== ======
The Company has provided a valuation allowance against the entire net
deferred tax asset at December 31, 2001 and 2002 due to the uncertainty as
to the realization of the asset.
The provision (benefit) for income taxes for the three years in the period
ended December 31, 2002 was offset by changes in the valuation reserve.
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $42.0 million for federal income tax purposes, which begin to
expire in 2003, and research and development tax credit carryforwards of
approximately $748,000, which begin to expire in 2003, all of which are
available to offset federal income taxes due in future periods. Net
operating loss carryforwards of $3.2 million expired during the year ended
December 31, 2002 and $1.5 million will expire in the year ended December
31, 2003. The Company has approximately $28,000 in alternative minimum tax
credits which do not expire.
NOTE ELEVEN. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The
Company's customers are not concentrated in any specific geographic region
but are concentrated in the health care industry. Significant sales were
made to three customers. Owens & Minor accounted for 10% of the Company's
net sales in 2001. Sales to Mannatech, Inc., accounted for 38%, 30%, and
35% of the Company's net sales in 2000, 2001 and 2002, respectively.
Accounts receivable from Mannatech represented 53% of gross accounts
receivable at December 31, 2002. Sales to Medline Industries, Inc.,
accounted for 35% and 34% of the Company's sales during 2001 and 2002,
respectively. Accounts receivable from Medline represented 25% of the
Company's gross accounts receivable at December 31, 2002. The Company
performs ongoing credit evaluations of its customers' financial condition
and establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers and historical trends and
other information.
NOTE TWELVE. NET INCOME (LOSS) PER SHARE
Basic net income (loss) available to common shareholders per share was
computed by dividing net income (loss) by the weighted average number of
common shares outstanding.
In calculating the diluted net income (loss) per share for the three years
ended 2002, no effect was given to options or warrants, because the effect
of including these securities would have been antidilutive. In 2001 all
options and warrants had exercise prices which exceed the average market
price of the common stock during the year.
NOTE THIRTEEN. REPORTABLE SEGMENTS
The Company operates in two reportable segments: human and veterinary
products sold through its Medical Services Division and Caraloe, Inc., a
consumer products subsidiary, which sells bulk raw materials, consumer
beverages and nutritional and skin care products. Caraloe also provides
product development and manufacturing services to Customers in the cosmetic,
nutraceutical and medical markets.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the Summary of
Significant Accounting Policies (Note Two).
Corporate income (loss) before income taxes set forth in the following table
includes research and development expenses which were related to the
development of pharmaceutical products not associated with the reporting
segments. Assets which are used in more than one segment are reported in
the segment where the predominant use occurs. The Company's production
facility in Costa Rica, which provides bulk ingredients for all segments,
and total cash for the Company are included in the Corporate Assets figure.
Reportable Segments (in thousands)
Medical Caraloe,
Services Inc. Corporate Total
----------------------------------------------------------------
2001
----------------------------------------------------------------
Sales to unaffiliated
customers $10,400 $7,194 $ - $17,594
Income (loss) before
income taxes 1,333 1,121 (2,076) 378
Identifiable assets 12,481 1,420 7,316 21,217
Capital expenditures - - 1,132 1,132
Depreciation and
amortization 586 - 464 1,050
----------------------------------------------------------------
2002
----------------------------------------------------------------
Sales to unaffiliated
customers $8,394 $9,647 $ - $18,041
Income (loss) before
income taxes (10) (552) (2,916) (3,378)
Identifiable assets 15,006 1,960 5,193 22,159
Capital expenditures - - 378 378
Depreciation and
amortization 634 - 453 1,087
----------------------------------------------------------------
NOTE FOURTEEN. RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company had a 23% interest in a company which was
formed in 1998 to acquire and develop a 5,000 acre tract of land in Costa
Rica to be used for the production of Aloe vera L. leaves, the Company's
primary raw material. The Company's initial investment was written-off in
1998 and no additional investments have been made or are expected to be
made. The Company is accounting for its investment on the cost basis. The
Company purchases Aloe vera L. leaves from this company at prices the
Company believes are competitive with other sources. Such purchases totaled
$417,000, $450,000 and $468,000 in 2000, 2001 and 2002, respectively.
NOTE FIFTEEN. SUBSEQUENT EVENT
In March 2003 the Company received a loan of $500,000 from Bancredito, a
Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is U.S. Prime
Rate plus 2.0%. The loan is secured by a mortgage on an unused, 164 acre
parcel of land owned by the Company in Costa Rica plus a lien on specified
oral patch production equipment. The proceeds of the loan will be used in
the Company's operations.
NOTE SIXTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited selected quarterly financial data below reflect the fiscal
years ended December 31, 2001 and 2002, respectively.
(Amounts in thousands, except shares and per share amounts)
--------------------------------------------------------------------------
2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Revenue $4,657 $4,330 $4,381 $4,226
Gross profit 2,000 1,866 2,040 1,885
Net income 226 60 77 15(1)
Diluted income per
share $0.02 $0.01 $0.01 $0.00
Weighted average
common shares 9,728,000 9,734,000 9,747,000 9,809,000
--------------------------------------------------------------------------
2002 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Revenue $3,736 $4,346 $5,093 $4,866
Gross profit 1,145 1,472 2,042 1,643
Net loss (1,042) (858) (541) (937)
Diluted loss per
share $(0.11) $(0.09) $(0.05) $(0.09)
Weighted average
common shares 9,819.000 9,849,000 9,908,000 9,944,000
--------------------------------------------------------------------------
(1) The fourth-quarter results benefited from a one-time gain of $326,000,
partially reversing a charge taken earlier in the year as a pricing
reserve related to a strategic sales and marketing partnership.
Fourth-quarter and full-year results benefited from a one-time gain of
$211,000 from adjustments to state tax liabilities booked in prior
periods.
Financial Statement Schedule
Valuation and Qualifying Accounts
(In thousands)
Description Additions
----------------
Balance Charged Charged
at to to Balance
Beginning Cost and Other at End
of Period Expenses Accounts Deductions of Period
--------------------------------------------------------------------------
2000
--------------------------------------------------------------------------
Bad debt reserve $ 304 $ 116 $ - $ 322 $ 98
Inventory reserve 430 316 - 304 441
Rebates 340 4,508 - 4,576 272
Reserve for ACI
and Aloe & Herbs
non-current notes and
investments included
in other assets 1,292 - - 27 1,265
Oregon Freeze Dry, Inc. 699 223 - 922 -
--------------------------------------------------------------------------
2001
--------------------------------------------------------------------------
Bad debt reserve $ 98 $ 55 $ - $ 53 $ 100
Inventory reserve 441 91 - 16 516
Rebates 272 - - 272 -
Reserve for ACI
and Aloe & Herbs
non-current notes and
investments included
in other assets 1,265 - - 31 1,228
--------------------------------------------------------------------------
2002
--------------------------------------------------------------------------
Bad debt reserve $ 100 $ 38 $ - $ 28 $ 110
Inventory reserve 516 135 - 19 632
Reserve for ACI
and Aloe & Herbs
non-current notes and
investments included
in other assets 1,228 - - 19 1,209
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Carrington Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Carrington
Laboratories, Inc. and subsidiaries as of December 31, 2001 and 2002 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed in the
Index at Item 15(a) for the same periods. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Carrington Laboratories, Inc. and subsidiaries as of December
31, 2001 and 2002, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information
set forth therein.
Ernst & Young LLP
Dallas, Texas
February 28, 2003, except for Note Fifteen
as to which the date is March 10, 2003
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CARRINGTON LABORATORIES, INC.
Date: March 27, 2003 By:/s/ Carlton E. Turner
----------------------------------
Carlton E. Turner, Ph.D.,D.Sc.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
------------------------- ----------------------------- --------------
/s/ Carlton E. Turner President, Chief Executive March 27, 2003
------------------------- Officer and Director
Carlton E. Turner, Ph.D., (principal executive officer)
D.Sc.
/s/ Robert W. Schnitzius Vice President and Chief March 27, 2003
------------------------- Financial Officer
Robert W. Schnitzius (principal financial and
accounting officer)
/s/ R. Dale Bowerman Director March 27, 2003
-------------------------
R. Dale Bowerman
/s/ George DeMott Director March 27, 2003
-------------------------
George DeMott
/s/ Thomas J. Marquez Director March 27, 2003
-------------------------
Thomas J. Marquez
/s/ Selvi Vescovi Director March 27, 2003
-------------------------
Selvi Vescovi
CERTIFICATION
I, Carlton E. Turner, President and Chief Executive Officer of Carrington
Laboratories, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Carrington
Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report ("Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 27, 2003 /s/ Carlton E. Turner
-----------------------------------
Carlton E. Turner,
President & Chief Executive Officer
(principal executive officer)
CERTIFICATION
I, Robert W. Schnitzius, Vice President and Chief Financial Officer of
Carrington Laboratories, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Carrington
Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report ("Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 27, 2003 /s/ Robert W. Schnitzius
-------------------------------------------
Robert W. Schnitzius
Vice President and Chief Financial Officer
(principal financial and accounting officer)
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ----------------------------------------------------- ----
3.1 Restated Articles of Incorporation of Carrington
Laboratories, Inc. (incorporated by reference to Exhibit
3.1 to Carrington's 1999 Annual Report on Form 10-K).
3.2 Statement of Change of Registered Office and Registered
Agent of Carrington Laboratories, Inc. (incorporated by
reference to Exhibit 3.2 to Carrington's 1999 Annual
Report on Form 10-K).
3.3 Statement of Resolution Establishing Series D Preferred
Stock of Carrington Laboratories, Inc. (incorporated by
reference to Exhibit 3.3 to Carrington's 1999 Annual
Report on Form 10-K).
3.4 Bylaws of Carrington Laboratories, Inc., as amended
through March 3, 1998 (incorporated herein by reference
to Exhibit 3.8 to Carrington's 1997 Annual Report on
Form 10-K).
4.1 Form of certificate for Common Stock of Carrington
Laboratories, Inc. (incorporated herein by reference to
Exhibit 4.5 to Carrington's Registration Statement on
Form S-3 (No. 33-57360) filed with the Securities and
Exchange Commission on January 25, 1993).
4.2 Rights Agreement dated as of September 19, 1991 between
Carrington Laboratories, Inc. and Ameritrust Company
National Association (incorporated by reference to
Exhibit 4.2 to Carrington's 1999 Annual Report on Form
10-K).
4.3 Amendment No. 1 to Rights Agreement dated October 21,
1998 (incorporated herein by reference to Exhibit 4 to
the Company's Form 8-A/A Post-Effective Amendment No. 1).
10.1+ Retirement and Consulting Agreement dated August 14,
1997 between Carrington Laboratories, Inc. and David
Shand (incorporated herein by reference to Exhibit 4.1
to Carrington's quarterly report on Form 10-Q for the
quarter ended September 30, 1997).
10.2+ First Amendment to Retirement and Consulting
Agreement dated September 30, 1997 between Carrington
Laboratories, Inc. and David G. Shand (incorporated
herein by reference to Exhibit 4.2 to Carrington's
quarterly report on Form 10-Q for the quarter ended
September 30, 1997).
10.3 Contract Research Agreement dated as of August 8,
1991 between Carrington Laboratories, Inc. and Texas
Agriculture Experimental Station, as agent for the Texas
A&M University System (incorporated herein by reference
to Exhibit 10.55 to Carrington's 1991 Annual Report on
Form 10-K).
10.4 + Employee Stock Purchase Plan of Carrington Laboratories,
Inc., as amended through June 15, 1995 (incorporated by
reference to Exhibit 10.9 to Carrington's 1999 Annual
Report on Form 10-K).
10.5 Common Stock Purchase Warrant dated September 14, 1993
issued by Carrington Laboratories, Inc. to E. Don
Lovelace (incorporated by reference to Exhibit 10.10
to Carrington's 1999 Annual Report on Form 10-K).
10.6 Common Stock Purchase Warrant dated September 14, 1993,
issued by Carrington Laboratories, Inc., to Jerry L.
Lovelace (incorporated by reference to Exhibit 10.11
to Carrington's 1999 Annual Report on Form 10-K).
10.7 Lease Agreement dated June 15, 1994 between DFW Nine,
a California limited partnership, and Carrington
Laboratories, Inc. (incorporated by reference to Exhibit
10.12 to Carrington's 1999 Annual Report on Form 10-K).
10.8 Lease Amendment dated August 23, 1994 amending Lease
Agreement listed as Exhibit 10.12 (incorporated by
reference to Exhibit 10.13 to Carrington's 1999 Annual
Report on Form 10-K).
10.9 Production Contract dated February 13, 1995 between
Carrington Laboratories, Inc. and Oregon Freeze Dry,
Inc. (incorporated by reference to Exhibit 10.14 to
Carrington's 1999 Annual Report on Form 10-K).
10.10 Modification Number One dated February 19, 1996 to the
Production Contract dated February 13, 1995 between
Carrington Laboratories, Inc. and Oregon Freeze Dry,
Inc. (incorporated by reference to Exhibit 10.15 to
Carrington's 1999 Annual Report on Form 10-K).
10.11 Modification Number Two dated November 11, 1996 to the
Production Contract dated February 13, 1995 between
Carrington Laboratories, Inc. and Oregon Freeze Dry,
Inc. (incorporated by reference to Exhibit 10.16 to
Carrington's 1999 Annual Report on Form 10-K).
10.12 Modification Number Three to the Production Contract
dated February 13, 1995 between Carrington Laboratories,
Inc. and Oregon Freeze Dry, Inc. (incorporated herein
by reference to Exhibit 10.89 to Carrington's 1998
Annual Report on Form 10-K).
10.13+ 1995 Management Compensation Plan (incorporated herein
by reference to Exhibit 4.1 to Form S-8 Registration
Statement No. 33-64403 filed with the Commission on
November 17, 1995).
10.14 Trademark License Agreement dated August 14, 1997
between Caraloe, Inc. and Mannatech, Inc. (incorporated
herein by reference to Exhibit 10.2 to Carrington's
quarterly report on Form 10-Q for the quarter ended
September 30, 1997).
10.15 Supply Agreement dated August 14, 1997 between Caraloe,
Inc. and Mannatech, Inc.(incorporated herein by
reference to Exhibit 10.3 to Carrington's quarterly
report on Form 10-Q for the quarter ended September 30,
1997).
10.16 Letter of Agreement dated January 12, 2000 extending
Trademark License Agreement and Supply Agreement between
Caraloe, Inc. and Mannatech, Inc. (incorporated by
reference to Exhibit 10.21 to Carrington's 1999 Annual
Report on Form 10-K).
10.17 Trademark License and Product Supply Agreement dated
July 22, 1997 between Caraloe, Inc., and Nu Skin
International, Inc. (incorporated herein by reference to
Exhibit 10.1 to Carrington's quarterly report on Form
10-Q for the quarter ended September 30, 1997).
10.18 Non-exclusive Sales and Distribution Agreement dated
August 22, 1995 between Innovative Technologies Limited
and Carrington Laboratories, Inc. (incorporated herein
by reference to Exhibit 10.6 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
10.19 Supplemental Agreement dated October 16, 1995 to Non-
exclusive Sales and Distribution Agreement between
Innovative Technologies Limited and Carrington
Laboratories, Inc.(incorporated herein by reference to
Exhibit 10.7 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.20 Product Development and Exclusive Distribution Agreement
dated November 10, 1995 between Innovative Technologies
Limited and Carrington Laboratories, Inc.(incorporated
herein by reference to Exhibit 10.8 to Carrington's
Third Quarter 1995 Report on Form 10-Q).
10.21 Form of Stock Purchase Agreement dated April 5, 1995
between Carrington Laboratories, Inc. and persons named
in Annex I thereto (incorporated herein by reference to
Exhibit 2.1 to Carrington's Registration Statement 33-
60833 on Form S-3).
10.22 Form of Registration Rights Agreement dated June 20,
1995 between Carrington Laboratories, Inc. and persons
named in Annex I thereto (incorporated herein by
reference to Exhibit 2.2 to Carrington's Registration
Statement 33-60833 on Form S-3).
10.23 Supply and Distribution Agreement dated March 22,
1996 between Farnam Companies, Inc. and Carrington
Laboratories, Inc. (incorporated herein by reference to
Exhibit 10.76 to Carrington's 1995 Annual Report on Form
10-K).
10.24+ Carrington Laboratories, Inc. 1995 Stock Option Plan,
As Amended and Restated Effective January 15, 1998
(incorporated herein by reference to Exhibit 10.3 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.25+ Form of Nonqualified Stock Option Agreement with Outside
Director, relating to the Registrant's 1995 Stock Option
Plan, as amended (incorporated herein by reference to
Exhibit 10.3 to Carrington's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.26+ Form of Incentive Stock Option Agreement for Employees
(incorporated herein by reference to Exhibit 4.4 to
Carrington's Second Quarter 1996 Report on Form 10-Q).
10.27 Sales Distribution Agreement dated December 20, 1996
between Recordati, S.P.A. and Carrington Laboratories,
Inc. and Carrington Laboratories Belgium
N.V.(incorporated by reference to Exhibit 10.55 to
Carrington's 1996 Annual Report on Form 10-K).
10.28 Sales Distribution Agreement dated December 4, 1996
between Darrow Laboratorios S/A and Carrington
Laboratories, Inc. (incorporated by reference to Exhibit
10.59 to Carrington's 1996 Annual Report on Form 10-K).
10.29 Supply Agreement dated February 13, 1997 between Aloe
Commodities International, Inc. and Caraloe, Inc.
(incorporated by reference to Exhibit 10.63 to
Carrington's 1996 Annual Report on Form 10-K).
10.30 Sales Distribution Agreement dated November 1, 1995
between Laboratories PiSA S.A. DE C.V. and Carrington
Laboratories, Inc. (incorporated by reference to Exhibit
10.70 to Carrington's 1996 Annual Report on Form 10-K).
10.31 Sales Distribution Agreement dated January 1, 1998
between Carrington Laboratories, Inc. and Carrington
Laboratories Belgium N.V. and Henry Schein U.K.
Holdings, Ltd., (incorporated herein by reference to
Exhibit 10.1 to Carrington's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).
10.32 Sales Distribution Agreement dated January 5, 1998
between Carrington Laboratories, Inc. and Carrington
Laboratories Belgium N.V. and Saude 2000 (incorporated
herein by reference to Exhibit 10.2 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
10.33 Sales Distribution Agreement dated March 27, 1998
between Carrington Laboratories, Inc. and Carrington
Laboratories Belgium N.V. and Hemopharm GmbH
(incorporated herein by reference to Exhibit 10.4 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.34 Promissory Note of Aloe Commodities International,
Inc.,dated June 17, 1998, payable to the order of the
Registrant in the principal amount of $200,000
(incorporated herein by reference to Exhibit 10.4 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.35 Letter agreements dated September 30, 1998 and November
4, 1998 between Aloe Commodities International, Inc.
and the Registrant amending due date of Promissory Note
dated June 17, 1998 from Aloe Commodities International,
Inc. to the Registrant (incorporated herein by reference
to Exhibit 10.2 to Carrington's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
10.36 Letter Agreement dated February 4, 1999 between Aloe
Commodities International, Inc. and the Registrant
amending due date of Promissory Note dated June 17,
1998 from Aloe Commodities International, Inc. to the
Registrant (incorporated herein by reference to Exhibit
10.98 to Carrington's 1998 Annual Report on Form 10-K).
10.37 Promissory Note dated July 1, 1998 of Rancho Aloe,
(C.R.) S.A. payable to the order of the Registrant in
the principal amount of $186,655.00 (incorporated herein
by reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998).
10.38 Wound and Skin Care Purchase Agreement dated August 27,
1998 between American Association for Homes & Services
for the Aging and Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit 10.2 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.39 Purchase Agreement dated October 1, 1998 between Vencor,
Inc. and Carrington Laboratories, Inc. (incorporated
herein by reference to Exhibit 10.3 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.40 Promissory Note of Aloe & Herbs International, Inc.
dated November 23, 1998 payable to the order of the
Registrant in the principal amount of $300,000
(incorporated herein by reference to Exhibit 10.92
to Carrington's 1998 Annual Report on Form 10-K).
10.41 Clinical Services Agreement dated January 25, 1999
between Carrington Laboratories, Inc. and PPD Pharmaco,
Inc. (incorporated herein by reference to Exhibit 10.96
to Carrington's 1998 Annual Report on Form 10-K).
10.42 Common Stock Purchase Warrant dated November 23,
1998, issued by Aloe and Herbs International, Inc. to
Carrington Laboratories, Inc. (incorporated herein by
reference to Exhibit 10.99 to Carrington's 1998 Annual
Report on Form 10-K).
10.43 Letter dated February 25, 1999 from Aloe Commodities,
Inc. to Carrington Laboratories, Inc. (incorporated
herein by reference to Exhibit 10.1 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999).
10.44 Exclusive Sales Representative Agreement dated April 13,
1999, between Caraloe, Inc. and Classic Distributing
Company (incorporated herein by reference to Exhibit
10.1 to Carrington's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
10.45 Terms Sheet for Lease of Rancho Aloe Farm Land to Sabila
Industrial dated April 20, 1999 (incorporated herein by
reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999).
10.46 Terms Sheet for Maintenance of Sabila Industrial Plants
on Leased Land dated April 20, 1999 (incorporated herein
by reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999).
10.47 Exclusive Sales and Trademark Agreement dated June 11,
1999, between Caraloe, Inc. and Nutra Vine (incorporated
herein by reference to Exhibit 10.1 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.48 Lease Agreement dated September 23, 1999 between Rancho
Aloe and Sabila Industrial, S.A. (incorporated herein by
reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999).
10.49 Letter Agreement dated September 29, 1999 between
Aloe Commodities International, Inc. and Carrington
Laboratories, Inc. (incorporated herein by reference to
Exhibit 10.1 to Carrington's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
10.50 Sales Distribution Agreement dated October 26, 1999.
between Carrington Laboratories, Inc. and E-Wha
International, Inc. (incorporated by reference to
Exhibit 10.78 to Carrington's 1999 Annual Report on
Form 10-K).
10.51 Supplier Agreement dated August 6, 1999 between
Novation, LLC and Carrington Laboratories, Inc. MS 91022
(incorporated by reference to Exhibit 10.80 to
Carrington's 1999 Annual Report on Form 10-K).
10.52 Supplier Agreement dated August 6, 1999 between
Novation, LLC and Carrington Laboratories, Inc. MS 91032
(incorporated by reference to Exhibit 10.81 to
Carrington's 1999 Annual Report on Form 10-K).
10.53 Distributor and License Agreement dated November 3, 2000
between Carrington Laboratories, Inc. and Medline
Industries, Inc. (Exhibits A, B and C to this agreement
have been excluded pursuant to a request for
confidential treatment submitted by the registrant to
the Securities and Exchange Commission)(incorporated by
reference to Exhibit 10.82 to Carrington's 1999 Annual
Report on Form 10-K).
10.54 Supply Agreement dated November 3, 2000 between
Carrington Laboratories, Inc. and Medline Industries,
Inc. (Exhibit A to this agreement has been excluded
pursuant to a request for confidential treatment
submitted by the registrant to the Securities and
Exchange Commission, (incorporated by reference to
Exhibit 10.83 to Carrington's 1999 Annual Report on
Form 10-K).
10.55 Lease Agreement dated January 22, 2001 between
Plazamerica, Inc and Carrington Laboratories, Inc.
10.56+ Employee Stock Purchase Plan of Carrington Laboratories,
Inc., as amended through May 17, 2001 (incorporated by
reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2001).
10.57+ 1995 Stock Option Plan of Carrington Laboratories, Inc.,
as amended and Restated Effective January 15, 1998 and
further amended through May 17, 2001 (incorporated by
reference to Exhibit 10.2 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2001).
10.58+ Employee Stock Purchase Plan of Carrington Laboratories,
Inc., as amended through November 15, 2001 (incorporated
by reference to Exhibit 10.87, filed on Carrington's
Form 8-K on March 20, 2002).
10.59 * Lease Agreement dated February 28, 2003 between
Maintenance Warehouse/America Corp and Carrington
Laboratories, Inc.
21.1 * Subsidiaries of Carrington
23.1 * Consent of Independent Auditors
99.1 * CEO Certification of SEC Reports Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 * CFO Certification of SEC Reports Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed herewith.
+ Management contract or compensatory plan.